Technical analysts spend their days poring over market data in search of price and volume patterns they hope will provide insight into the health and direction of the financial markets. Some prominent analysts see troubling signs in indicators ranging from 10-year Japanese government bond yields to the Dow Jones transportation average.
CONSUMER STOCKS SEND A SIGNAL
Discretionary consumer stocks, which typically do well in a strong economy and a bull market, recently broke below their 43-week exponential moving average (a type of moving average that gives more weight to recent data). "We've seen a major trend break, and that's not something we want to see for very long," says Mark Arbeter, chief technical strategist for Standard & Poor's (MHP). "This indicator has worked well in the past, and when it breaks down, it is usually not a good sign."
THE MOVING AVERAGE TURNS DOWN
Carter Braxton Worth, chief market technician for Oppenheimer Asset Management (OPY), considers the 150-day moving average—a running tally of the average of a stock market's closing prices for the past 150 days—to be "the single most important indicator." In late May, when that average for the MSCI All Country World Index flattened and declined, "the bullish phase in global equities ended," he says. When the trend moves down, he believes, investors who bought recently at higher prices are likely to sell at the first sign of an upward move, cutting rallies short.
DOW THEORY SAYS SELL
Dow Theory tracks the relationship between the Dow industrials and Dow transports. Both indexes had been rising since March 2009, but on June 7 fell to what Ralph Acampora of wealth-management firm Alverita calls "important secondary lows." That set the stage for a rally that failed to take them to new closing highs. A selloff in late June took the averages below their June 7 close and into bear territory, says Acampora, who has used Dow Theory for 45 years. He thinks the industrials could fall to 8,400 or 8,000, or 15% to 20% from current levels.
INVESTORS PLAY IT SAFE
Several indicators raise warning signs for Jordan Kotick, head of technical strategy at Barclays Capital (BCS). Investors seeking safe-haven investments globally sent yields on securities such as the 10-year Japanese government bonds below a key level in the week ended June 30. That same week, U.S. 10-year bond yields broke below a 12-month level, prices of base metals fell, and the flight to quality into the Swiss franc continued. Kotick says those are all signs "the stock market is feeling risk-averse, and therefore it will not be a good scene."
Data: Bloomberg; Standard & Poor's; Oppenheimer Asset Mgmt.; Alverita; Barclays Capital