Another Breakdown Effort. What’s It Gonna Take?

The scariest apart about Tuesday’s renewal of some all-too-familiar weakness? Not that it’s happening in response to poor earnings reports. It’s that it’s happening despite some relatively encouraging ones. As of the most recent look, the S&P 500 is on pace to have earned $35.83 per share for the first quarter of 2018, up from an estimate of $35.64 as of the end of March. A little more than 77% of companies that have reported Q1 numbers managed to top earnings estimates, which is a bit higher than the norm.

Granted, only 117, or about one-fourth, of the S&P 500’s constituents have posted first quarter results, so we’re not even looking at the majority of the market thus far. Nevertheless, 117 companies is a pretty good-sized sample, and so far, so good.

It’s just not been good for stocks. Even in the face of good news, stocks are struggling – and took one on the chin with Tuesday’s action – the bulls are finding good reason to retreat.

That’s concerning… the complete unwillingness to even try to see the glass as half-full. It appears traders are subconsciously thinking a corrective move is inevitable (and they may be right), but the longer that mindset festers subconsciously, the more it cements itself in place and then starts to ooze out in the form of actual selling.

And we’re getting uncomfortably close to a major support level again.

The daily chart of the S&P 500 below tells the tale. Thanks to Tuesday’s 15% tumble, the index is back within striking distance of the pivotal 200-day moving average line (green). This will be the third time since February it’s been tested, and like any other test, the more times it’s taken, the more chances there is to fail it.

There’s also the lower Bollinger band lingering at 2579. It would be naive to ignore the distinct possibility it could also serve as a floor, spurring a rebound before the S&P 500 moves any further into correction territory.

The S&P 500 is now 8.4% below January’s peak price from January, though it had been down as much as 11% with the early April low. That’s the near end of a ‘normal’ correction of between 10% and 20%. But, given how long the market had gone without a major correction since late 2016, one would think a bigger corrective move would be in the cards now. And, it still may well be.

Don’t get the wrong impression though. Such a setback has nothing to do with the market’s fundamentals. It’s a purely procedural matter or right-pricing an overvalued market. A 20% correction would be a buying opportunity.

And that prospect continues to linger; the clue lies in the VIX. Though the market is tanking, for some reason the VIX isn’t surging. One would expect it to soar with market setbacks as (1) people were surprised and (2) fearing the worst. The fact that the VIX remains tame suggests few traders are surprised or worried. It also makes it clear that investor panic isn’t swelling… something we’d normally see at trade-worthy bottoms.

The VIX will likely be in the 40/50 area at the bottom the S&P 500 will likely be well below the lower Bollinger band if and when we see that possibility unfurl.

Underscoring the concern that traders have already, at least somewhat, planned out a bigger pullback in their minds is (once again) growing bearish volume ($DVOL) and tapering bullish volume ($UVOL). The volume tide tends to turn before the market tide does, and the volume tide has already turned rather decisively.

Problem: These are all red flags we’ve seen waving before, to no avail. It is telling that the sellers continue to take swings; sooner or later they’ll land a punch. Maybe. On the other hand, it would be naive to think this isn’t a politically, emotionally charged market here. That sets the stage for anything. Traders can rationalize some pretty crazy stuff when properly motivated… good and bad.

That’s the long way of saying, this is still a day-to-day matter, and that you should keep everything on a short leash.