Stock Warning: 'Death Cross', Narrowing Breadth Are Noted

Decline, Deterioration, and Bear Warnings

By Dennis SlothowerWritten Saturday, June 3, 2017

Trump Rejects Climate Pact

The stock market responded favorably to the President's announcement that the United States will be pulling out of the Paris Climate Pact that benefits countries like China and India at the expense of the U.S.

Whether you agree or disagree with the President's decision, the financial markets liked the news. Under the terms of the deal, the earliest the U.S. can formally extricate itself from the accord is November 4, 2020 (the next presidential election day). So, in a manner of speaking, the actual decision will be made at the next Presidential election.

The stock market also liked the news coming from private jobs. The ADP Employment Report improved to 253K in May from 174K in April, encouraging investors that perhaps Friday's jobs report might be a strong one too. Usually, jobs improve this time of the year with the growing season but the markets believe the President is taking constructive steps to improve job creation.

Economic Data in Decline As Banks Pump Stocks Again

While financial institutions pumped the stock market today on this climate rejection news, typical of the market going into what might be a favorable jobs report, overarching our stretched market is the Fed's continuing tightening of the monetary policy with the probability of a rate hike now climbing to 91% in the June FOMC meeting.

The three rate hikes we've had up to this point are affecting the economy.

Today's "Construction Spending Report" produced a big disappointment, as total spending declined 1.4%, verses expectations of a +0.5% increase. Seasonally, construction should be picking up with warmer weather but higher interest rates are affecting construction.

This certainly will undercut the GDP for the second quarter.

This is also related to yesterday's "Pending Home Sales" which came in at -1.3% from the previous month at -0.9%. Rising interest rates do matter.

Another clue of financial stress building is the $1 trillion owed on credit cards and the growing delinquencies in spite of full employment.

Delinquencies are rapidly climbing even though the initial jobless claims continue to fall. This is a revealing chart because it illustrates that more and more Americans aren't making it on their part-time jobs, especially as health insurance premiums rise.

Technically, the big-cap technology stocks continue to lead the indexes higher and are incredibly stretched or disconnected to their mean averages, dangerously so.

At the same time we continue to see more deterioration in market breadth.

Technical Topping Amid Crushing Commodity Declines

The jittery markets seen this week are mostly a byproduct of equity prices reaching the top of several trading channels where corrections normally occur. In addition, traders are suddenly spooked by the crushing declines in the energy commodities at a time of the year when driving demand accelerates and oil/gas prices usually spike. This divergence is real and should give all market investors concern that upside potential may no longer exist for the broader markets as well:

As you can see, a death cross signal has occurred for crude oil, where the current prices are below both the 50-day moving average and the 200-day moving average and where the 50MA has just crossed below the 200MA. This is the beginning of a bear market for crude oil. And as crude oil goes, the rest of the equity market typically follows.

To see this decline in even greater clarity and across a broader energy market, take a look at the leveraged energy fund XLE:

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