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The Market Is Flashing Another Warning Sign

By Jeff Clark
Thursday, March 1, 2012

One by one, the stock market's most important sectors are showing signs of breaking down.
 
Two weeks ago, we highlighted the bearish development in transportation stocks. Now, it looks like the financial stocks are in trouble...
 
It has been a good year so far for the bank stocks. The banking index ($BKX) is already up 13% in 2012. But the sector is overbought and we're starting to see the same sort of warning signs that led transportation stocks to a 4% decline in February.
 
Take a look at this chart of the financial sector bullish percent index ($BPFINA)...
 
 
A bullish percent index (BPI) measures the percentage of stocks in a sector that are trading with bullish chart formation. It's a way of measuring overbought and oversold conditions. A sector is considered "overbought" when its BPI stretches above 80. Since it's a percentage, the maximum reading for any BPI is 100.
 
The bullish percent index for the financial sector closed yesterday above 87. That's the highest reading in the past two years... And it's a good indication of just how overextended things have become.
 
Here's a chart of the banking index ($BKX)...
 
 
The banking index is on the verge of breaking to the downside of a bearish rising-wedge pattern. You can also see the negative divergence in the MACD momentum indicator. This indicates the recent move higher occurred on falling momentum. That's a negative sign and usually increases the odds of a breakdown.
 
If BKX breaks down, a reasonable downside target is around $40 per share. That's a drop of about 14% from yesterday's closing price... and it wipes out all of 2012's gains.
 
We've been on alert for a possible broad stock market correction. If the financial sector breaks down along with the transportation average, the rest of the stock market won't be far behind.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

Jeff has been warning Growth Stock Wire readers about bearish setups in the Volatility Index and overbought sectors. And things are setting up a lot like 2011, when the market pulled back quickly.
 
"Everything I wrote back then leaned bearish. A correction was coming," he writes. "Stocks were set up for a quick, hard decline. Anyone with too much exposure to the stock market was going to feel the pain." Find out why Jeff says the market is waving a caution flag today.

In The Daily Crux
Market Notes
Oil-related "trophies" ExxonMobil, Suncor, and Kinder Morgan surge 25% or more since October.
 
Credit card companies are booming... Visa, MasterCard, and Discover Financial hit new all-time highs.
 
Emerging markets are breaking out... China and Brazil touch six-month highs.
 
First Solar sinks 25% over the past three months... even as the S&P 500 rises 15%.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1365.68 -0.5% +2.9%
Oil (USO) 40.92 +0.3% +4.4%
Gold (GLD) 164.29 -5.3% +19.3%
Silver (SLV) 33.55 -6.4% +1.3%
U.S. Dollar 78.82 +0.8% +2.1%
Euro 1.33 -1.1% -3.5%
Volatility (^VIX) 18.43 +2.7% +0.4%
Gold Stocks (^HUI) 529.70 -3.4% -6.1%
10-Year Yield 1.98 +2.6% -41.9%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 137.02 -0.4% +5.1%
S. Korea (EWY) 59.87 +1.6% +4.4%
S. Africa (EZA) 69.71 -1.3% +3.6%
Singapore (EWS) 12.89 +0.6% +2.8%
China (FXI) 40.29 +0.0% -3.3%
Taiwan (EWT) 13.61 +1.3% -3.7%
Lat.America (ILF) 48.62 -0.8% -4.0%
Japan (EWJ) 9.99 -1.8% -11.6%
Canada (EWC) 29.02 -0.3% -12.0%
Israel (ISL) 13.07 -1.9% -16.0%
India (IFN) 23.32 -0.7% -18.5%
Russia (TRF) 17.50 -0.3% -26.3%

Sector ETFs
Symbol Price
Change
52-Wk
Retail (PMR) 24.45 -0.7% +23.2%
Big Pharma (PPH) 73.61 +0.6% +14.1%
Utilities (XLU) 34.89 0.0% +13.2%
Health Care (IYH) 75.33 -0.6% +12.6%
Big Tech (QQQQ) 64.41 -0.5% +12.5%
Consumer Svcs (IYC) 77.88 -0.3% +11.3%
Biotech (PBE) 22.19 -1.1% +5.5%
Real Estate (IYR) 60.14 -0.1% +3.2%
Industrials (IYJ) 70.38 -0.6% +2.2%
Transportation (IYT) 91.93 -0.4% +1.3%
Defense (PPA) 20.03 -0.1% +1.3%
Construction (PKB) 13.62 -0.3% -1.0%
Telecom (IYZ) 22.26 -1.0% -1.6%
Software (PSJ) 26.02 -1.2% -2.3%
Media (PBS) 14.72 -0.6% -3.1%
Water (PHO) 18.91 -1.6% -3.4%
Internet (HHH) 70.21 +0.1% -3.8%
Insurance (PIC) 16.05 -0.7% -4.6%
Financials (IYF) 55.08 -0.4% -7.5%
Basic Mat (IYM) 71.29 -1.9% -8.2%
Oil Service (OIH) 121.00 +2.4% -11.4%
Semis (PSI) 15.61 -1.1% -12.2%
Nanotech (PXN) 6.50 -1.7% -36.3%
Alt. Energy (PBW) 5.76 -3.4% -45.5%

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