Market Hits Headwinds On Earnings, Economic Data And Technical's....Wrong Sector Leading The Bull

The market has had a nice run in to the worst possible economic reports, and mostly poor earnings reports. We know why. It's called low rates. Even though we're seeing a slowing down in our own back yard, with a 0.5% reading on GDP, the market has been reluctant to fall. Very frustrating if you're a bear since you seem to be getting exactly what you need, but you haven't been seeing the market fall. Until this week. Finally, some real selling with the Nasdaq down roughly 3%. The S&P 500 down as well, but not as hard, and I'll discuss why that's the case shortly. There are numerous reasons for the fall. We did hit 70 RSI on most of the daily index charts recently, but, more importantly, we also have been showing negative divergences on those same daily index charts, and that can be a lethal combination for the market short- to medium-term.

The selling was a bit more intense than I anticipated, since I expected the S&P 500 to hold critical trend line, gap and horizontal support at 2070 today. The reason I thought it would hold is because you don't normally lose that type of critical support without it gapping below at the open of trading. We started well above, but managed to fall below it as the day moved along. Not common behavior at all. This was a good week for the bears. They finally did a bit of damage on price, and also saw the oscillators confirm those price losses, which is something that has been missing for a long time. Most price losses haven't been accompanied by those daily oscillators, so the bears can take a good vibe from that finally taking place. Nothing terrible has happened, but there was a break in the trend. Now we'll have to discover whether it's something more significant for the future or whether it's just simple unwinding from those daily negative divergences that also needed to unwind from overbought daily RSI's. The next few weeks will be more than a little bit interesting.

While there have certainly been reports on earnings that have been celebrated by the street, the majority of key stocks, heavily weighted stocks, have shown that business isn't so good these days. The biggest of the big have been getting hit very hard. Netflix, Inc. (NFLX), Google Inc. (GOOG), and especially Apple Inc. (AAPL), just to name a small few. AAPL is the most concerning, and you'll see that this evening on the weekly chart. You can see very clearly that 92.00 is huge support. If AAPL were to lose 92.00 on a closing basis, a move into the 70's is not out of the question, and whoever thought that possible just a few weeks back. Mr. Icahn reported that he sold all of his AAPL stock and it has been all downhill ever since.

That to go along with a-very-bad-earnings report not only has hurt Apple Inc. (AAPL), but all the stocks that service AAPL, and their technology. The food chain from AAPL is quite large, and it has extended quite far, many taking a beating. Every sector is seeing the carnage on some level. This is the worst quarter for earnings that I've seen in quite some time. The weekly charts provided this evening shows you the losses in many different areas of the stock market, and that was due mostly to bad earnings reports. The negative divergences already existed, but they needed a catalyst to get the market to fall, and those earnings reports were surely that catalyst. With many sector charts near the top of their ranges it took bad reports to keep them from breaking out in to those negative divergences. The earnings season is clearly a bust for the bulls.

Make no mistake about one thing, folks. This is still very much a bull market. The onus is on the bears to change that scenario. They have the ammunition they need to make that change, but will they? That is still unclear, and truthfully there still isn't a drop of distribution suggesting things are going to fall apart. That can always change in a heartbeat. That said, there is a problem here. At this moment in time, and for the past several months, in fact all of 2016, the bull market is being led by the wrong group of stocks. By the wrong sectors. A true, rip-roaring bull is ALWAYS led by froth, and the Nasdaq. The land of the ridiculous in terms of valuations. This bull is now being led by safety areas. By lower P/E, and higher dividend stocks.

The market wants very little to do with froth and risk. Higher P/E stocks are being avoided for the Most part. Always exceptions, but for the most part we are seeing an avoidance of the technology stocks by the big money buyers out there. The money is rotating into safety. A very unhealthy bull market. Still a bull, but unhealthy. We see it clearly in the results for the first four months of calendar year 2016. The S&P 500 is up over 1%, while the Nasdaq is down close to 5%. Quite a difference, and, again, very unhealthy. When we see the market lead with froth again we'll know the market is on better footing. That we can trust it more. When you can go to sleep at night with a 400 P/E stock, and know it'll be higher in the morning, that's when you know the real bull is upon us.

So now we focus on the lost support area of 2070 on the S&P 500. The bulls need to take it back quickly, or the bears will get braver as time moves along. The longer we trade below 2070 the more likely it is we'll test key, exponential moving averages still below current price. 2040 on the S&P 500 is massive support, or the 50-day exponential moving average. Below that is the 200's at 2018. Only if we lost both over time would I say we have a real problem here. The Nasdaq has lost all of its moving averages, but since it has underperformed so much this year, it's no shock. Only if we see 2018 go away on the S&P 500 do we have some real problems for the bulls. So we take it day to day and see if we can recover 2070 before visiting 2040 first. The bears will fight very hard to prevent 2070 from being taken out. Things have definitely gotten far more interesting.