Wednesday, May 18, 2016

What's spooking the stock market?

Mid-week market update: No, it isn't just a more hawkish Federal Reserve that's spooking the stock market. Stock prices were been falling before Fedspeak and the latest FOMC minutes sounded a more hawkish tone. The SPX staged a successful test of its 2040 neckline support of its head and shoulders pattern today. In fact, today`s action could be interpreted constructively as it is experiencing a minor positive divergence on RSI-5.

Don`t blame the Fed. Market weakness is a symptom, not the cause of the retreat.

I turned more cautious on the stock market last week because of growing market fears of a slowdown in China (see Tactically taking profits on the commodity and reflation trade). There seems to be a bifurcation starting to occur in the global economy. The US macro picture looks fine as the American economy is motoring along, as evidenced by the latest news of the April rebound in industrial production. Outside the US, the picture looks far less rosy.

The latest BoAML Fund Manager Survey revealed the top two tail-risks on fund managers' minds were Brexit and China, which did not appear as a source of concern in the previous month's survey. It's no wonder that the markets are getting spooked.

Here's how I am preparing myself and how I would watch for the turn upwards, should it come.

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