Chasing Risk? This Market Won’t Be Kind to You

My stock screens have been displaying up signals over the past few days, but I’m still somewhat apprehensive about the most recent stock market rally—and you should be too.

The stock market appears to be edging higher again after the S&P 500 closed above 1,900 at another intraday high on May 23. And while there is some buying support on the stock market charts, I still question the sustainability of any strong upside moves at this time, given the lack of any new catalyst. The reality is that the absence of any leadership and continued concerns towards technology and growth stocks suggest the stock market remains vulnerable at this time.

Where I’m sensing the most risk continues to be the technology sector and small-cap stocks, despite some current relief buying.

Some technical analysts might argue that the move of the Russell 2000 back above its 200-day moving average (MA) is positive; however, I would question the lack of mass stock market participation, given the lighter volume and the questionable and flat investor sentiment, based on my technical analysis.

The chart of volume on the NASDAQ (below) shows how weak the trading volume has been since mid-March, when it was above the 50-day and 200-day MAs. Note the downside bearish crossover of the 50-day MA (blue line) below the 200-day MA (red line) as indicated by the blue oval.

Chart courtesy of www.StockCharts.com

The NASDAQ and Russell 2000 remain below their respective 50-day MAs. Their failure to recover this key technical level is a red flag.

Also what concerns me regarding the NASDAQ is not only the presence of a bearish head-and-shoulders formation, but the fact that we last saw a bullish investor sentiment reading on the index on April 24. Since the start of April, there have only been six bullish readings and six bearish sessions, with the remaining showing a neutral result. These sentiment readings do not currently support a sustainable rally toward the growth elements of the stock market.

The lack of mass market participation is also a red flag. While the NASDAQ has edged higher, the upward move has been narrow. In April and May, there have only been 11 sessions in which the NASDAQ traded over two billion shares.

While I’m not expecting a severe stock market correction, I do feel we could be in for a bigger correction, especially with the lack of any major catalyst and what I previously discussed.

Given the recent rally in the stock market—particularly in the higher-beta stocks—I suggest taking some money off the table. You could also protect against the downside risk in technology by hedging with put options on the Powershares QQQ (NASDAQ/QQQ) exchange-traded fund (ETF).

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