A recent Bank of America research report warned investors to "tread lightly" in global markets. The pattern and longer-term indicators suggest selling into rallies.
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Analyst Stephen Suttmeier said the S&P 500 has not decisively broken down but the risk remains for a distribution top that goes back nearly two years. Should the S&P 500 "Generals" follow the weakness in the Value Line, NYSE, Russell 2000 and S&P Midcap 400 "Troops," there is risk below 1,8121,810 toward 1,730 (38.2 percent of the 20112015 rally), and then 1,6001,575.
"We would view this as a cyclical correction of a larger secular bull trend or a bullish retest of the secular breakout," Suttmeier wrote in a note to clients.
Meanwhile, the Dow Theory sell signal in late august was reconfirmed on February 11. Monthly MACD sell signal last March and the first weekly MACD sell signal below zero since 2008 in early January. Bullish daily MACD & VXV/VIX support a tactical bounce.
"A rise off extreme lows for net free credit (free credit balances in cash and margin accounts net of the debit balance in margin accounts) could exacerbate an equity market sell-off," Suttmeier said.
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The high yield market remains a risk with the U.S. high yield index in a weaker pattern than the S&P 500. Growth weakening is relative to value for large caps, small caps, and MSCI ACWI. Relative breakdowns for FANG (Facebook Inc (FB), Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX), Google/Alphabet Inc (GOOGL) (GOOG)) and NASDAQ 100 leadership suggest that "Generals" have begun to follow the "Troops."
The analyst said bearish January barometer and the S&P500 is not following the normally bullish seasonal periods of NovemberJanuary and NovemberApril.
The 2016 is a presidential election year. The average return for an election year with a non-first-term president is -3.2 percent vs. 14.1 percent in an election year with a first-term president and 7.6 percent for all presidential election years.
On the Europe DM, the analyst said tactical rallies within weak trends. Big resistances are at 2,9703,055 on STOXX 50 and near 350 on STOXX 600.
In Asia-Pacific, Japan is losing leadership status vs. MSCI ACWI ex-US, which is a bearish sign. Big resistance on tactically rallies for the Nikkei 225 comes in at 17,09917,905. The secular bull market breakout for Japan is under pressure. Hong Kong and Singapore stabilize within weak trends.
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