Stocks have breathed a sigh of relief following earnings season. Nevertheless, cracks are spreading beneath the surface. The chart shows a compilation of nonconventional indicators that are waving a yellow flag. Breadth is thinning, as evidenced by the downtrend in the NYSE A/D line. Sentiment is also poor, with bullish investors throwing in the towel at an accelerating pace (second panel). Rather than view this contrarily, it can often be a sign that selling may accelerate. Moreover, once vibrant M&A activity is cooling rapidly (top panel), and the news has been recently dominated not by deal making, but by deal break ups. This may reflect increased trepidation about further adding debt to already bloated corporate sector balance sheets (third panel). Bottom Line: Resist the temptation to deplete cash balances, and continue to favor defensives over deep cyclicals. A capital preservation mindset is still warranted.
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