Can We Expect Further Downside in US Stocks?

The recent turmoil in the markets has some investors and traders nervous. That is almost to be expected. We have a smooth bull market for years now, and the correction in February was violent. The S&P 500 fell from a high of 2873 to a low of 2634. On the 9th of that month, the low was put in on high volume, seemingly as buyers stepped in to get some perceived deals. Over the next month, we traded higher, with the S&P tagging the 2800 level. Then the trouble began again. Since then, we have seen the S&P trade lower, almost taking out its February low. On April 2nd it closed just above 2580, just 7 handles away from the February low. We currently sit at 2600, well off of that low, but not quite in a place where we can feel comfortable.

My take is that until we close above the low that was put in between the two peaks, it is a good idea to stay away from stocks. If we should close above that (blue horizontal line), I think that the path of least resistance is higher. If we close below the 2580 (red horizontal line) level, then I think further downside is most likely.

                                                                    S&P 500 Daily

This is only taking into account one factor, however: the actual S&P 500. There are a lot of other markets we should be looking at to make a call about stocks. Here, I want to take a look at financial stocks.

XLF, the financial sector ETF, closely tracks the stock market. Some might say it even leads the stock market. This should be no surprise, because the big banks have a good vantage point on the overall economy. If they aren't doing well, then there is a good chance that no one is. One key difference between the S&P and XLF during the recent volatility: XLF actually closed at fresh lows and the S&P did not. Even so, we have seen a bounce in the financial stocks. The same lines and ideas apply to the XLF chart below: above blue is a healthy sign, below red is not a healthy sign.

                                                                       XLF Daily

Before we continue, it is important to note the other line on these 2 charts: the 200-day exponential moving average. This is a key level that many large investors and traders watch. So far it has acted as a rough level of support. It is also near the lows that each market closed at. It is an important line to watch. Let's also not lose perspective. Despite the strength in financial stocks, XLF has yet to close above the highs that preceded the 2008 crash.

                                                                        XLF Weekly

The components of XLF are important to look at, because, well, they make up the ETF. The 6 biggest components are: Berkshire Hathaway ($BRK.b), JP Morgan ($JPM), Bank of America ($BAC), Wells Fargo ($WFC), Citigroup ($C), and Goldman Sachs ($GS). Of these, Berkshire, Wells Fargo, and JP Morgan are well above their pre-crisis highs. Goldman Sachs is above its pre-crisis high as well, but just barely. Languishing, we have Bank of America and Citigroup. Given the different positions of these components relative to their pre-crisis highs, it isn't a surprise to see XLF struggling a little bit, albeit close to its own highs.

When you look at the major financial stocks on a shorter time frame, they look quite similar to the S&P 500. Below are their daily charts. Again, I am watching 2 levels: the level to hold to the downside and the level we need to get through to the upside. I believe it is important to keep an eye on all of these, because if one begins to slip, the others could follow.

                                                $BRK.b looks strong and is above key resistance

                                              $JPM is just trading at its key resistance level right now

                                                       $WFC is very ugly. Relatively weak and below key levels

                                               $C falls into the middle of the pack. It is midway between key levels

                                                 $BAC is holding up well, nearer to highs than the others

                                             $GS is also holding up relatively well

Again, there are many pieces to look at to figure out what is going on: economic data, international markets, breadth indicators, ratios between different sectors, and more. This is just one piece of the puzzle. Many market participants like to try to predict what is going to happen next. I believe that you need to wait for the market to tell you. Right now, the market is in a state of indecision, and until some of the above-mentioned levels are breached, we will likely remain in this state.