For months now, the question has been when the stock market rally that began in November would finally face a downward correction.
Now, everyone is starting to talk about market "internals" breaking down – various technical factors that are warning of a pullback.
In a note this morning, Miller Tabak Chief Technical Market Analyst Jonathan Krinsky says "t he cracks in the market appear to be growing, with the small-caps and transports severely underperforming."
Doug Kass says the same thing today, pointing to "subsurface weakness" in the market.
Here are a few points Kass highlights in his note:
The Russell 2000 underperformed on Monday (-1.3%) and was down (-0.5%) on an up day on Tuesday.
The advance/decline line is eroding as the market's rise narrows.
Breadth disappointed – yesterday, NYSE decliners eclipsed advancing issues by over 200, excluding ETFs and fixed-income closed-end funds.
The number of new 52-week highs is narrowing .
The bank stocks/brokerages are lagging.
Transports trailed, down 1.5% and 1.2% on the first two days of the week, respectively -- check out the chart of FedEx ( FDX ).
Semis got schmeissed (-2.0% on Monday and -0.8% on Tuesday).
The cyclical index dropped by -0.7% on Tuesday, following a 1.2% decline on Monday -- check out the chart of Caterpillar ( CAT ).
The yield on the 10-year U.S. note remains low (1.86%) and is signaling slowing domestic economic growth -- speaking of the bond market, this week brought a continued disconnect between Treasury note and bond yields (lower by 3 to 4 basis points) compared to the market averages (slightly higher in price).
" It is an unusual market feature when defensive stocks are among the leading groups in a market moving to new highs," says Kass.
On the other hand, Phoenix Partners Group Chief Equities Strategist Michael Block doesn't think these signals are necessarily anything to worry about.
" As for the argument that defensives have led, my advice is to think about what quant factors might be leading those stocks higher here," says Block. "There are style, size, and fundamental factors there that are likely the cause... and it has nothing to do with them being hiding places."
Block points out that Russell 2000 outperformance is still trending up despite recent weakness, and that he considers these technical factors " an early warning sign and nothing to jump in against with both feet."
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