Whether it‘s election jitters, the Federal Reserve, or just weak earnings, several key areas of the stock market — small stocks, railroads and home building — now show technical breakdowns. And not to be outdone, both ultrasafe Treasury bonds and ultrarisky junk bonds have also cracked.
It is hard to think that the broad stock market can move much more to the upside, barring a sudden Fed move or an election surprise, when these engines are shut down. I don’t think even Facebook (ticker: FB) can help, even if its earnings after the bell Wednesday continue to shine.
The Russell 2000 index of small-capitalization stocks broke down below a key short-term support level last week. The chart shows some sort of undefined topping pattern beginning in July. We could argue about what to call it, but it really doesn’t matter.
What does matter is the break of the more compelling technical feature in the support level that goes back to early 2014 (see Chart 1). The long-term chart shows this critical breakdown below the level that supported the market in early 2015 before the last serious decline last year. It also shows a breakdown below the rising trendline that supported the rally this year, so we have to pay attention to this double whammy.
The next area is home building. The iShares U.S. Home Construction exchange-traded fund (ITB) peaked in July and is down roughly 14% since then (see Chart 2). It also moved below chart support from May and June, dropped below its 200-day average, and gave up more than half of what it had gained since bottoming in February.
In other words, the trend here is down, and technical indicators do not show anything to refute that.
The last group that I find to be very telling about the state of the market – and the economy — is railroads. There is no pure-play ETF to chart, so the Dow Jones U.S. Railroads industry group will have to fill in (see Chart 3).
Currently, the index sits on the edge of a cliff at the crossroads of its rising 2016 trendline and its horizontal support level going back to April. Officially, there is no breakdown, and technical analysis demands that we wait until one actually occurs before getting too bearish.
Yet most of the biggest railroad stocks in the group do indeed show varying degrees of support breaks, led by the October smash-down of Union Pacific (UNP). Disappointing third-quarter earnings from the sector’s largest stock by market value sent it down nearly 7% on Oct. 20, and that sparked a serious trend break to the downside.
The bond market hasn’t fared much better. The iShares 20+ Year Treasury Bond ETF(TLT) has been in decline since the summer, and last week it confirmed a breakdown below its 200-day moving average and dropped below another chart support.
But the real news was the breakdown in the high-yield, or junk, bond market. After rallying nicely since February, the SPDR Bloomberg Barclays High Yield Bond ETF(JNK) made a clear move below its trendline. Volume was also quite heavy (see Chart 4).
According to the on-balance, or cumulative volume, indicator — a proxy for supply and demand — junk bonds have been under pressure since August. The indicator eased lower to suggest money leaving the ETF, and over the past few days it accelerated that pace. It is a classic “risk off” sentiment shift, as nervous investors shed their riskier assets.
Taken together, we have key sectors for the market, the economy, and the market mood all breaking down. Anything goes in the current election season, but for now the market is telling us that it does not like what it sees— no matter who ends up in the White House.