A month ago, I outlined a
for stocks but said I'd be on the lookout for warning signs.
Well, now they're starting to appear.
The first problem is that earnings forecasts have showed a marked
weakening. While this was largely expected, it's hard to say how
much of it was priced into the market. It's a little bit like a
beloved relative passing away: Just because you know it's coming
doesn't make the bad news any less painful.
We all knew technology would be weak, but the selling in big
industrials such as General Electric, 3M, and Tyco is what's
really caught my attention. Today's price action in Boeing was
equally worrisome for the bulls because it opened higher by
almost 3 percent but closed lower. It also looks as if the
aerospace giant is rolling over at its 200-day moving average,
which is never a good sign.
The second problem is that the S&P 500 has now slipped below
its 50-day moving average for the first time since June. It
initially bounced there on Oct. 15 but failed to hold it Monday
and has now closed below it for the last two sessions.
The third problem is that the rally in the
appears to be running out of steam. These have been the strongest
major industry group on
over the last 12 months. But the charts of companies such as
Lennar and Toll Brothers show falling MACD indicators at the same
time prices have climbed. That's called bearish divergence, and
it often precedes a pullback.
Some of these, especially LEN and TOL, have returned to long-term
levels that could become resistance.
Another concern is that the Fed repeated the usual mantra of
quantitative easing in its policy statement on Wednesday, yet
investors sold the news. Have we all built up a tolerance to Ben
The last problem is my own bullishness. Readers know I have been
very positive on stocks for a while, and I
the third-quarter rally when most other commentators spewed
nothing but gloom and doom. Unfortunately being right has a nasty
tendency to make people complacent and blind to warning signs
that might go against their expectations. I very well might be
guilty on this front.
Of course, I can still rattle off reasons to like stocks, but I
won't even mention them. After all, they will be even more true
after the market goes lower.
The next two sessions could determine direction for a while
because we get initial jobless claims and durable goods
tomorrow, while Friday brings GDP and consumer sentiment. I
suspect they will be positive. The question is: Will the market
care? I'll be watching how the market reacts when the news
If we do head lower, it's good to have a shopping list of short
candidates so you can profit from the bloodletting. Here are some
that make sense to me:
Bank of America (BAC):
Yes, it's been a great trade from the long side, but it's been
stalled around $9.30 for more than a month and could easily head
back toward $8.
This is one of my favorite little industrials, and it's been on
an incredible run for the last year with one great earnings
report after another. But it failed to hold a bullish gap after
the most recent set of numbers. MACD has also been falling since
July. If people start anticipating a weaker economy, AZZ could
take a beating.
This blue-chip is parked at long-term resistance around $61, a
level that goes back more than a decade. Puts are very cheap in
this name, and weakness in the broader market could easily send
it down to $57.50 or even $55.
On the long side, health insurers like
could be immune to a weak economy and have recently seen lots of
bullish call buying
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Oct. 24.)
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