3 Key Factors Causing Fresh Stock Market Pressure

 | Feb 02, 2018 | 10:44 AM EST
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"Enter, stranger, but take heed
Of what awaits the sin of greed,
For those who take, but do not earn,
Must pay most dearly in their turn."

-- J.K. Rowling, Harry Potter and the Sorcerer's Stone

It has happened gradually this week but the character of the market has shifted sufficient to put the strong uptrend under pressure and to cause concern that a topping process may have started.

There are three factors at work that are causing problems for the market right now. The first is that the indices have become technically extended after a straight up move since the start of the year. Until the past week it has been relentless move of record-setting persistence.

When stocks or markets go up one of the negatives is that they do not form areas of support so when a correction does occur the drops can be quite sharp. If you look at the current market the S&P 500 really has no base of support all the way down to the highs that were hit in December. That doesn't mean that it will fall that far but it raises the risk of sharp dips as the indices look for support.

The second issue that the market is dealing with is related to the first. The very strong move over the past month has created a 'sell the news' dynamic. Even if earnings are very good the news has been well anticipated and is priced in. When there is a strong report there will be a greater inclination to sell and lock in gains rather than to chase the stock higher because it is still a good bargain.

We have seen this 'sell the news' phenomena a number of times during this earnings season with the semiconductor names like Lam Research (LRCX) and Intel  (INTC)  being good examples. Despite very good earnings the stocks have not been able to generate any momentum although analysts have been quite bullish.

This morning it is Amazon.com (AMZN) , Action Alerts PLUS holding Alphabet (GOOGL) and Action Alerts PLUS holding Apple (AAPL) that must contend with the 'sell the news' issue. Apple is seeing a minor bounce despite some negative analyst comments, Google is trading down on some analyst cuts but Amazon is higher and is even more extended as it looks for a new all-time high. We'll see how these stocks develop today but they have technical issues that will be clarified as the earnings news is digested.

The third issue the market is dealing with is the most troublesome. Bond yields are rising as inflation worries are stating to build. The bears have long predicted that the catalyst for a major market top would be increased interest. They have been dead wrong for many years but now there are some signs that those worries could be slowing down this market.

The key charts to watch here are the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) and the iShares Barclays 20+ year Treasury Bond Fund (TLT) . Yesterday the IEF fell to the lowest levels since 2014 and that caused some major consternation.

This morning we have the January jobs report at 8.30 am ET which will likely have an impact on these bonds. The market has been very comfortable with strong economic growth because there have not been any signs of inflation but if the jobs number is strong and wages go up, then there will be concerns about a more hawkish Fed and more selling of bonds.

We have had a Goldilocks environment for a very long time. Growth has been hot enough to keep the market going but not so strong as to cause worries about inflation. Bonds are signaling a shift in inflation and that is a key reason behind the selling pressure.

In the early going the indices are under pressure for the fifth time this week. On all five days this week we have had at least one notable pullback. That is a significant change in the character of the price action. For most of January there was nary a downtick and even the thought of a pullback seemed to attract dip buying.

I have constantly counseled that the way to navigate this market is to stay focused on price action. The priced action is now flashing a warning sign and increased caution is necessary.

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