Friday, February 19, 2010

Bearish tripwires

S&P 500 500 futures are down around 1% as I write this in the wake of the Fed's surprise discount rate hike.

Despite the negative news, it's important to take deep breath, step back and analyze the market with some perspective. In the framework outlined in my post bulls are losing control, here are some impotant relative performance charts that I am watching as signs that the bears may have taken control of the market.

Cyclicals are still holding up
The chart below shows the relative performance of the Morgan Stanley Cyclical Index (CYC) relative to the S&P 500. CYC staged a relative breakout in early December and continues to lead the market. Should it break down below its relative support line, it would be a sign that the bears have the wind at their backs.

Financials are on the verge of a breakdown
The chart below shows the relative performance of the Financials compared to the S&P 500. Financials have two unique characteristics in this cycle. First, they are where the stresses in the system show up and therefore a good canary in the mine as to the health of the market.

The sector is in a relative downtrend and it's on the verge of a breakdown and I expect that it would decline further at the open. Should it decline below its relative support zone, it is another signal that the end of a brief period of ursine hiberation is at hand.

Stay tuned!

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