Stock Market Halitosis
Rising interest rates have been a headwind for the stock market all year.
Now those winds are picking up to gale-force strength and the market could be in for a major storm as a result.
Last week, the Fed raised short-term interest rates by another quarter-point. That makes eight rate hikes since the Fed’s tightening campaign began in December 2015.
This week, yields on the benchmark 10-Year U.S. Treasury topped 3.2% for the first time in seven years.
The Fed seems hell-bent on continuing to turn the screws with more rate hikes forecasted for the next policy meeting in December, plus several more in 2019.
Financial markets are starting to take notice and it’s spooked investors in both stocks and bonds this week.
Higher interest rates alone shouldn’t be alarming.
But several other negative variables clustered together, namely ongoing trade tensions with Europe and China, plus contentious midterm elections next month, could make things get really bad.
The biggest red flag is the price action of the stock market. Recently, I alerted Wealth Watch readers to the market’s case of bad breadth.
Since then, it’s gone from bad to worse.
As you can see in the chart above, after a correction early this year, the Nasdaq (lower panel) has made a series of new highs in recent months.
That’s good right?
Well, not necessarily.
The fly in the ointment is fewer and fewer stocks are participating in the march to new highs. In fact, only 47% of Nasdaq stocks are currently above their 200-day moving average.
That’s a significant red flag for the market, because the 200-day moving average is widely regarded as the dividing line between a bull and bear market.
In other words, 53% of Nasdaq stocks are in their own private bear markets right now, trending below their 200-day average. If you look at similar charts for the NYSE and S&P 500 the message is the same. Too many stocks are falling by the wayside.
Here’s more evidence of bad market breadth. Last week alone 1,192 more Nasdaq stocks declined than advanced.
On the NYSE side, the score was even worse. 1,410 more stocks declined than advanced. New record highs in the major stock indexes with such poor participation rates from rank-and-file stocks is a major warning sign for the health of the market.
What to do?
I’m not ready to hit the panic button yet, but you should keep a watchful eye on these indicators.
Further deterioration in market breadth could spell big trouble ahead.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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