Falling U.S. stock market tech indicators give warning signals

Indicators, investors apply to assess the state of the U.S. stock market, have deteriorated, adding to concerns that the benchmark index could return to its bearish mid-June low.

The S&P 500 index has fallen 7% since mid-August after a sharp summer rally triggered by higher expectations of the Fed’s monetary tightening in order to lower consumer prices from 40-year highs.

The stocks’ weakening has provided more grounds for caution to people tracking market phenomena, including breadth, momentum, along with trading models, to justify their investment decisions. With a majority of indicators showing an optimistic forecast just a few weeks ago, they are now demonstrating a less optimistic one. Therefore, these forecasts raise fears that this year's market sell-off wouldn’t be over.

Factors that investors take into account include market breadth, indicating whether a significant number of stocks are rising or falling. A positive case, with more stocks going up than down, points to a high degree of confidence among exchange bulls.

Currently, market breadth has begun to give off warning signals. Stocks that trade above the 50-day moving average in the Russell 3000, have decreased to 30%, from the level of 86% in mid-August.

Moreover, the S&P 500 Index has remained below its 200-day moving average for five months, i.e. the longest streak since May 2009.

Technology stocks have been affected the most in recent weeks, while the Nasdaq Composite has fallen about 10% since mid-August.

Certain monitors foresee new challenges for the index, which recently formed a trend reversal from bullish to bearish, called a head-and-shoulders top.

Earlier, the index had already broken the “neckline” of the head-and-shoulders pattern, which is also known as a bearish development. According to ICAP analyst Brian LaRose, a fall through a recent low of about 10,500 could push the Nasdaq up to 8,800. In fact, the index closed Thursday at 11,862 points.

There is no doubt that techs may improve or deteriorate with markets fluctuating. Investors correct expectations based on the following drivers: the bond yield trajectory, which is determined by monetary policy expectations, while closely monitoring stocks.