Downside Risk Building for Investors

Friday the S&P 600 Small Cap index broke below near term support sending up the first warning signs of the year for the broad markets. The chart below shows the move below the trading range and the test of the 50 day moving average on Monday. What if anything does this mean for the sector and equally important, for the broad market? The sector goes on the negative watch list and we see how it develops or plays out short term. If my time horizon was short term, I would be stopped out of the position on the negative turn lower on Friday. Longer term the 50 day moving average will become the focal point for exiting the sector. Holding support at the 50 day was positive on Monday, and the positive close gave some hope to investors. Set your stops based on your strategy, but watch how one of the previous leaders plays out moving forward as an indicator for the broad markets.

Basic materials made a similar move to the small cap sector on Monday. In fact, the chart shows a double top pattern with a break of the previous low. The close was below the 50 day moving average and the only positive take away on the day was it held the uptrend line off the October low. The materials have been showing weakness over the last four weeks, but the break of support short term is the first validated negative turn for the sector. This is another warning sign for the broad markets overall as the sector has been under pressure from the volatility in the commodities pricing. Digging into the sector the specific weakness in mining and chemical stocks have been the challenge. Measure the risk if you own the sector or consider the opportunities if the downside continues.

Semiconductors made a continued move lower as well on Monday breaking support near 420 and testing the next level at 410. The topping or double top pattern broke below support and put investors on alert relative to the downside for the sector. Like the other sectors this is a short term move and has to be given a time perspective. The concern short term is this was one of the primary leaders for the broad market and especially the technology sector. Again put this on your watch list and manage the risk accordingly. Scanning the sector you find TXN and FCS both leading the move lower. The impact to the broader markets will key as we move forward.

Apple dropped more than two percent on Monday adding to the anxiety for investors. Putting the move into perspective relative to the run in the stock you can’t be overly worried or reactive at this point. However, you should know where the exits are if you own the stock. You don’t want to wait until there is a fire to plan your escape. Apple is a large part of the NASDAQ 100 index and could have a impact on the leadership of the index relative to the broad market. The index held the 10 day moving average on the move lower with 2555 the targeted level of support. The chart below of the index is on our watch list as well.