Overcoming the Fear of a Dying Market

It’s worse than it looks…

The major averages continued to backpedal yesterday. The NASDAQ led the way with a 2% loss on the day. But this is only part of the story.

The market inflicted most of its damage below the surface—out of the reach of the Dow and S&P. Today, I’m going to show you three charts that highlight how fear is quickly creeping back into this market…

First up is a spike in the 1-Month US Treasury Bill:

Yield on the one-month US Treasury bill

The yield on the 1-Month T-Bill is currently 5 standard deviations above its 50-day moving average, according to Bespoke Investment Group. This shows that investors are genuinely spooked at the possibility of a debt default happening before the end of the month…

As you can see from the chart, this is a much bigger spike than the one we witnessed during the 2011 (when the market coughed up 19% over similar debt ceiling fears mixed with the Eurozone crisis).

Next up is the Volatility Index:

VIX approaches 2013 highs

Thanks to a tumbling market, the unofficial “fear gauge” is starting to spike. It’s now within spitting distance of its summer highs…

Finally, there’s the sharp breakdown in tech and other momentum names:

NASDAQ Tech Sector Index

The NASDAQ Tech Sector Index isn’t the ugliest chart I could have printed. But it tells an important story. The tech high-flyers that have dominated the winner’s column over the past several weeks are beginning to nosedive.

The carnage is much more noticeable among individual names. YELP dropped nearly 8% on the day. Facebook shares lost more than 6%. In fact, anything that has produced big gains over the past couple of weeks is getting slaughtered…

Here’s the thing with momentum: It works until it doesn’t. And it’s tough to trust a market where so many leading stocks get chopped down in one trading day.

Forget about moving averages and oversold levels for a second. Now’s not the time to take a shot at any of these names on the long side. More selling could appear just around the corner…

Regards,

Greg Guenthner
for The Daily Reckoning

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Greg Guenthner

Greg Guenthner, CMT, is the editor of The Rude Awakening Pro, The Seven Figure Formula and Seven Figure Signals. Over the past decade, Greg has helped build the small-cap and technical research teams. His analysis has appeared in Forbes, Yahoo Finance, Bankrate, and countless other publications. Greg is a member of the CMT Association and holds...

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