For months, it's been clear that things aren't as they appear in the stock market. Placid investors, strength of big tech companies and the Dow Jones Industrial Average's recent rise above 22,000 points are masking deep-rooted issues that investors should be conscious of.
And those issues are coming to a boil. One catalyst seems to be the realization that both fiscal and monetary policy is turning in the wrong direction -- namely, interest rates are rising, while the Trump administration's plan to spur economic growth through tax cuts and infrastructure spending face mounting political challenges. And key areas of the market, including small-cap stocks and transports, are already rolling over.
Another headwind for stocks: rising fears of a government shutdown over passing a federal budget and raising the nation's borrowing limit, a situation worsened by President Trump's deteriorating relationship with. Meanwhile, Federal Reserve Chair Janet Yellen is expected to prepare financial markets for the start of "quantitative tightening" later this week at the Jackson Hole symposium after the latest about the risks to financial stability from bloated asset prices.
No wonder investors have been moving into precious metals over the past week, an asset class that has been moribund and rangebound for years. The Gold Shares SPDR (GLD) is coiling up near the upper end of a five-month consolidation range, preparing a possible breakout to pre-election highs.
On a technical basis, the situation grows increasingly bizarre. The Dow Transports continue to badly lag the Dow Industrials, dropping further below their 200-day moving average to a fresh multi-month low. Small-cap stocks remain under pressure as well, within the confines of a two-month downtrend.
A growing list of large-cap stocks are getting caught in the downdraft as well. Only 64 percent of the stocks in the S&P 500 are in uptrends, compared with a high of nearly 80 percent in early March. The ratio of new highs to new lows on the New York Stock Exchange has dropped to levels not seen since January 2016.
The list of familiar stocks at or near new lows is only getting larger: Exxon Mobil (XOM), General Electric (GE), Intel (INTC), IBM (IBM), Ford (F), Harley-Davidson (HOG), and even one-time tech favorites like Akamai (AKAM) and F5 Networks (FFIV).
Many are deep into bear markets of their own. GE shares are down 22 percent for the year. IBM is down 22 percent over the last six months, while Harley-Davidson and F5 have both fallen 20 percent.
According to SentimenTrader, when this kind of divergence was seen historically, stocks crawled to incremental new highs over the month that followed before giving way to either a new bear market or a major decline. This sets the stage for a downturn in September and October, which is historically a time when markets hit major turbulence.