The Path of Least Resistance is Lower

Yesterday’s move lower by U.S. equities, on 9/22,  was painful for investors, but that isn’t where the story ends, unfortunately. Within the context of market internals yesterday there was an element of foreboding that potentially spells trouble for our nascent rally off of our August 25 bottom. Not only did the broader market and all three major market indices move sharply lower on the day, expanding volume sponsored the move. The NYSE saw volume surge by 15.51% while the NASDAQ’s volume edged higher by 3.36%. Losing issues overwhelmed winners by roughly 4-1 on both the NYSE and NASDAQ as well. Every major sector of the S&P 500 and Dow Industrials lost ground on the day. Negative leadership was provided by Industrials (-1.83%), Financials (-1.50%) and Technology (1.40%).

As I suggested in yesterday morning’s pre-opening email note and evidenced in the day’s trading session, recent signs of weakness continue to abound within the context of market internals. Technically, there are also telltale signs that a move lower, to a potential retest of our August 25 lows, is in the air.  The NASDAQ has withheld the buffeting gale force winds of institutional selling best among the three major indices until recently. Briefly yesterday, the NASDAQ was negative on the year. Four sessions ago, last Friday to be exact, the NASDAQ failed to recapture its 50 DMA after nearly two weeks of positive but unconvincing price action. As a result, the 50 DMA  has become resistance – solidifying an institutional presence with a bias to the sell side. It is not as if you or I need to be informed that institutions have been net sellers for months but what is important to realize is the those sellers remain just above the market and will likely provide a collar to any meaningful upside for the near term.

Our current narrative leaves one begging a question; was our rally off the August lows the result of investor appetite or simply institutional sellers stepping away from deeply discounted prices? Was the lift in equity markets a sign of strength or weakness? Increasingly, the market appears to have more work to do on the downside. Even when markets rallied in late August, I suggested the work on the downside was left unresolved. I am afraid it appears as though I was not wrong.

Increasingly there has become a harmonic tone to sliding prices. Commodities from metals to energy to agricultural goods slid meaningful lower yesterday as if to validate and underscore the cautious tone taken by the Fed in its outlook for the global economy late last week. The icing on the cake? The little economic news we received yesterday was disappointing as the Richmond Fed Survey for September reflected contraction for the month. Today’s PMI data will likely have little to no impact on trade. The EIA Petroleum Status Report is significantly more front and center for traders, broadly speaking, but also for energy to energy-centric issues.

China themes of note: Chinese President Xi Jinping embarks on a positive American mission and China’s Caixin Manufacturing PMI falls to 6 1/2 year low.

In short, not only is our uptrend under pressure, distribution days are beginning to add up again and it appears as though the path of least resistance is lower.