The good times just keep rolling on.

All the major stock market indexes rallied to new all-time-highs last week. The Volatility Index (VIX) – the stock market’s “fear gauge” – dropped to a new 23-year low. Investors are once again enamored with the FANG stocks (Facebook, Amazon, Netflix and Google/Alphabet). 

So, the bulls are back in control. Stocks are moving higher. And, there’s absolutely nothing to worry about.

Then again… just as no one sees what’s happening beneath the asphalt right before a giant sinkhole opens up, almost no one is talking about what’s going on beneath the surface of the stock market. 

Many of the leading sectors are struggling. The Dow Jones Transportation Index has been in free-fall lately. Bank stocks are selling off. And, the semiconductor sector has not yet made a new high along with the rest of the stock market.

Take a look at these three sector charts. They show the Dow Jones Transportation Average Index (TRAN), the KBW Bank Index (BKX), and the PHLX Semiconductor Sector Index (SOX).

In a strong market environment, these sectors would be leading the way higher. So, their under-performance is noteworthy.

This isn’t a reason to sell everything and run for the hills. But, it is a reason to be a bit cautious in adding new money to the stock market – especially when you consider that the largest correction we’ve had all year was that measly 1.8% one-day drop in mid-May – which the market completely recovered three days later.

I don’t think we’re headed for a massive bear market just yet. Bear markets form through a series of lower highs and lower lows. So, it’s far too early to be talking about that.

But, we’re well overdue for at least a 5% correction.

So, think back to that day in mid-May when the S&P 500 dropped 1.8%. How did you feel then? How do you think you would feel with a drop three times as large?

With the traditional leading sectors now under-performing the action in the major indexes, we are starting to see cracks beneath the surface of the stock market. The odds are high that in two to three weeks, stock prices will be lower than where they are today. 

Conservative traders should hold off committing new money to the market. Aggressive traders can add some small exposure to the short side.

Best regards and good trading,

Jeff Clark

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