Troubling Signs in the Stock Market

10/05/2012 8:00 am EST


Ryan Detrick

Senior Technical Strategist, Schaeffer's Investment Research, Inc.

As concerns continue to mount, Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, counsels traders to be ready for anything.

I continue to have my near-term concerns with the market here. I noted back on September 18 two specific concerns I had, and after a few weeks, not much has changed, other than the market continues to drift lower.


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Have I been bullish this year? Sure have been. I continue to think that we will go much, much higher in the longer term, if for no other reason than hedge funds have missed this rally and will be aggressive buyers on weakness, along with the fact that no one believes in stock prices after such an amazing run. It's cliché to say, but the market really is climbing a wall of worry here.

One simply incredible stat that sums this up is word from of mutual fund giant Fidelity that they now have more money in bond and money market funds versus stock funds for the first time ever. Think about that. We are up near multi-year highs in the S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJI), and close to new all-time highs in small caps—yet investors continue to pour money into the "safe" areas. Phil Pearlman, the executive editor over at StockTwits, did a great job explaining why the Fidelity news is massively bullish, and I agree with everything he said. The bottom line still holds with what I noted back in July, and the crowd is still very anti-stocks here.

Which brings up the next point. If I'm so bullish over the longer term, what am I so concerned with now? Well, I'm a trader first and foremost. I am constantly questioning my own opinions and fully aware that I'm wrong a good deal of the time, just like everyone else. I saw some concerns creep up in early April within days of the peak, and then flipped to full out bullish, looking for a surprise summer rally by early June. I stuck with this bullish outlook through the summer and didn't waver on my stance that being long equities was the place to be, even when most were busy finding reasons why the economy would derail the rally. Well, after some impressive gains, my work is now showing some cracks in the armor, and I want to share what I'm seeing. Again, this isn't the end of the world, but could we finally be set up for more of a pullback here? I'm open to it, is all I'm saying.

NEXT PAGE: Areas of concern pile up…


I've been called a perma-bull and crushed on Twitter and various other media outlets for my bullish posture this year. I'm fine with that, but the reality is that, as a trader, I'm good with whatever happens, and I'll just trade it accordingly. Of course I want things to go higher, but I'll flip that stance in about 10 seconds if my indicators say otherwise. I like to think of myself more as a chameleon trader. I just change as the environment changes. The Fed is pushing the market up? So what, trade it long. I will say I don't buy that Fed argument much, and I think the reason we've rallied for three and a half years is that expectations have been so very low compared with reality. But whatever the reason, so be it, trade it 'til it doesn't work anymore.

Besides the concerns I mentioned a few weeks ago, the action in the true leader in this market, Apple Inc., is also concerning. A rollover by AAPL doesn't necessarily translate into a market crash, but it could be another warning sign that money might rotate out of the previous leaders and into some other areas in the near term.

Another concern creeping up that is worth noting. We've seen a spate of buying climaxes the past two weeks. Simply put, a selling climax occurs when a stock reaches a new 52-week low, then reverses and closes higher on the week. You tend to see a cluster of these near market lows, and they are considered to be spurred by the "smart money" (whoever that really is) accumulating bullish positions. The flipside is a buying climax, which is a new 52-week high followed by a sell-off and lower prices on the week. In other words, this action could be the result of smart money distributing shares.

I've had some great success with this indicator so far this year, and that's why now is troublesome for me. It nailed the early June lows, said stay long in early July, and remained bullish into August.

Now we've had two weeks of increasing buying climaxes. In fact, last week there were 124 signals—making it two straight weeks of more than 100 buying climaxes, according to all the stocks in our database. For reference, the last time we saw something like that was during the April peak.


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Take from this what you want. It isn't a huge doom and gloom sell signal, as I still expect any pullback to be aggressively bought here. However, as traders, it's our job to trade what the market gives us, and to me this suggests that investors be on the lookout for potential weakness.

By Ryan Detrick, Senior Technical Strategist, Schaffer’s Investment Research

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