Is it tin hat time once again?

The number of warnings about an imminent market correction are multiplying by the day, but is the outlook as grim as it seems?

US trader
Source: Bloomberg

The one chart we really need to keep an eye on is the monthly one of the S&P 500. Much was made of the crossover of the 10 and 20-month moving averages, an event that has not occurred since May 2008.

Since the crossover took place back in January, the market has actually recovered (providing a useful reminder of the old cliché that ‘price is the only indicator’).

S&P 500 monthly chart

Nonetheless, while the 15% recovery in the S&P 500 has assuaged some concerns, we have yet to see a firm move back even to the highs of 2015, let alone beyond into fresh ground. This repeats a worrying pattern from 2006 – 2008, when an extended range-bound period led to a dramatic selloff:

S&P 500 monthly boxes chart

We should also be concerned about volumes. Data from Yahoo! Finance indicates that volume activity for the S&P 500 continues to decline. In the May – July period of 2010, three-month average daily volume for the S&P 500 ETF (SPY) was 283 million shares.

This hit 322 million for the August – October 2011 period. At present, the figure is just 99 million shares, 34% of the 2010 figure and 30% of the 2011 number. Market rallies are being built on increasingly shaky foundations.

Below the surface of the S&P 500, something worrying is happening. The shift to lower volatility/defensive stocks goes on, as investors move away from cyclical and riskier assets.

This can be seen by looking at the ratio between an ETF that tracks high beta names, such as the PowerShares S&P 500 High Beta Portfolio ETF (SPHB) and the PowerShares Low Volatility Portfolio ETV (SPLV). The ratio has been trending lower since late 2014, and despite a bounce from the Feb lows the trend has yet to change:

High volume chart

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