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Five Reasons to Be Cautious Now


Looking for a mild correction -- or a dip-buying opportunity.

After a spectacular market advance, is it time to bring caution back? Here are some things to worry about:

1. Percentage of stocks above 10-day and 40-day moving averages have been steadily coming down.

And this has been true even as the major market indexes have continued their tentative advance. The percentage of stocks above their 40-day moving average has declined to 80% from 92% at the beginning of May, and the percentage of stocks above their 10-day moving average has fallen to an anemic 57% from high 80s. The negative divergence is somewhat concerning as it implies that a greater number of stocks are deteriorating even as the indexes stay close to their recent highs.

Click here to enlarge.

2. Small speculative stocks are the new momentum stocks.

Over the past few days, stocks under $10 have been running higher as though they're going out of style. Meanwhile, real momentum stocks Apple (AAPL), Google (GOOG), Amazon (AMZN) are being cast out of favor. We have looked at Goldman Sachs (GS) as one 'tell' among many about this rally and so far there was nothing to worry about but now GS is at the brink of breaking a significant channel. Now, this is not very drastic since there's significant support nearby, but the euphoria seems to be petering out. Leadership has become very narrow.

Click here to enlarge.

3. Good news isn't being rewarded as it used to be.

Even "less-bad" news received more accolades earlier. Qualcomm (QCOM), Texas Instruments (TXN), and Home Depot (HD) which sparked the market higher, themselves closed in the red yesterday.
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