5 Warning Signs For S&P 500 ETF In Stock Correction


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After running up four months straight, the S&P 500 has fallen into a correction. ETF investors should expect traders to take profits after such a long run. While there's no telling how much the market will fall, here are five signs that show the market is very weak.

1. High-volume distribution.

SPDR S&P 500 ETF ( SPY ) shot up to a four-year high of 148.11 Sept. 14 and then turned tail, closing in the lower half of its intraday range. Since then trading volume on the red days has outweighed volume on the up days. The SPY has logged seven distribution days in the past few weeks. This suggests institutions are selling more than buying and buyers' strength is waning.

Lee Munson, chief investment officer at Portfolio LLC in Albuquerque, N.M., recommends traveling to China for bargain shopping.

"China, while ugly beyond belief, is selling at a 20% discount to emerging markets. This is a first," Munson said. "If you want value, and think a hard landing has already been priced in, then China and emerging markets should be the place from now until the end of the year."

IShares FTSE China 25 Index ( FXI ),SPDR S&P China ( GXC ) andPowerShares Golden Dragon Halter USX China Portfolio ( PGJ ) offer easy access to the People's Republic.

2. Weak earnings outlook.

Earnings -- the biggest drivers of stock prices -- look ugly. Throngs of companies have issued negative pre-earnings announcements owing to slowing demand overseas as the global economy weakens. The negative-to-positive preannouncement ratio for the third quarter is 4.3, the weakest since the third quarter of 2001, according to Pat O'Hare, chief market analyst at Briefing.com.

Third-quarter corporate earnings are expected to drop 2.9% from the year-ago period, marking the first quarterly decline since 2009, according to Thomson Reuters.

A major Dow industrial component,Alcoa ( AA ), kicked off earnings season Tuesday night on a sour note. Owing to poor demand and low aluminum prices, the aluminum maker lost $143 million, or 13 cents a share, vs. a profit of $172 million, or 15 cents a share, in the year-ago period.

Fellow Dow member, Chevron (CVX) said third-quarter earnings would be "substantially lower" than the prior quarter.

Engine makerCummins (CMI) lowered its 2012 outlook for a second time this year.

3. As goes Apple...

Media hype often marks the beginning of the end for a stock as everyone and their brother has already bought it and there's no one left to buy to support the shares.Apple (AAPL) has fallen below its key 50-day moving average and is trading 9% below its 52-week high. It corrected 19% from April to May this year. It fell 15% peak to trough between October and November last year. So it could sink considerably more while staging a normal correction.

The tech giant accounts for nearly 20% ofPowerShares QQQ (QQQ) and 4.4% of SPY. As a major holding in those indexes, Apple could take both indexes down with it.

4. The smart money is short.

The so-called "smart money," or commercial traders in S&P 500, S&P 400 and Nasdaq 100 index futures, are overwhelmingly short the market, or betting it will go down, according to the latest Commitment of Traders reports . Meanwhile, the so-called "dumb money" or noncommercial traders, such as retail investors and speculators, are overwhelmingly long. More- knowledgeable commercial traders are more likely to be right than retail traders, who are generally wrong. Of course, that's not always the case.

5. History suggests caution.

The market didn't sell off in September, so it's due for a correction. Historically, the market dreads September, which has been the worst-performing month of the year for the Dow and S&P 500 since 1950, according to The Stock Trader's Almanac . It's been the worst month for the Nasdaq since 1971 and for the Russell 1000 and Russell 2000 since 1979.

"Performance does improve modestly in election years, but it is still negative nearly across the board," the Almanac stated in a client note. "Only the small caps of the Russell 2000 have been able to escape negative territory and post a modest 0.4% average gain in the last eight election-year Septembers."

"Anemic summertime trading volumes also offer little incentive to trade," the Almanac added.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: AA , FXI , GXC , PGJ , SPY

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