Schwab Live: Midweek Market Trend for March 22, 2017

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I wrote last week that while the S&P 500 was in a longer-term uptrend, there were some signs that shorter-term momentum was waning.  Now, as of this writing, (March 21) the market is suffering its biggest pullback of the year, with the S&P 500 slicing decisively through its 20-day moving average (Figure 1) (A).  Where might this pullback end?  The first potential level would be at the 50-day moving average at around 2326 (B).  Below that we have the January highs at around 2300 (C).

Figure 1: 

Source: StreetSmart Edge®

One of the reasons for the recent pause in the rally has been the weaker action of the financials (Figure 2). The sector had been one of the leaders of the post-election rally, handily outperforming the broader market (A).  That outperformance has now stopped (B). 

Figure 2: 

Source: StreetSmart Edge®

Part of this recent under performance stems from a drop interest rates.  The FOMC decision and subsequent commentary was taken by many market participants to be a bit more dovish than expected and, as a result, the yield on the ten year treasury fell back into the middle of its recent range (Figure 3). The behavior of the financials is quite important for the overall market as they have the second highest weighting in the S&P 500.

Figure 3: 

Source: StreetSmart Edge®

There has been also some less than stellar action in the Russell 2000. The small cap index has now violated both the 20- and 50-day moving averages (Figure 4). The next level of support comes at the 2017 lows of around 1340 (A). 

Figure 4: 

Source: StreetSmart Edge®

The Russell has lagged the S&P quite badly over the last month (Figure 5).   It would be better for the market if the Russell can start holding its own, or, better yet, start to outperform.

Figure 5: 

Source: StreetSmart Edge®

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