THURSDAY, JUNE 3, 2010
Stocks Staring Down the Barrel of a Gun
By MICHAEL KAHN
Several key stock markets around the world have reached technical sell signals.
UH, OH.
In March, I wrote about a very ominous signal that fired in Portugal and Spain, two of the PIIGS markets in Europe (see Getting Technical, "Trouble Brewing in Europe," March 24). That signal has now spread to other countries across the continent and across the globe to keep the pressure on investors.
The signal is called a "death cross" and it occurs when the 50-day moving average crosses below the 200-day average. As its name implies, it is not a good thing for the market involved. More specifically, it tells us that the weakness of May was not a correction but that the major trend has likely changed for the worse.
In France, benchmark CAC-40 index scored its death cross Tuesday. This is not much of a surprise as French banks have a large exposure to countries with sovereign-debt problems. Indeed, the exchange-traded fund based on the French market, the iShares MSCI France Index Fund (EWQ), had its death cross as early as March.
But now we can see adeath cross in the Netherlands as the iShares MSCI Netherlands Investable Market Index Fund (EWN) scored its signal last week.
And in the United Kingdom, while the benchmark FTSE-100 index, fondly known as the "Footsie," has not had any signals t he iShares MSCI United Kingdom Index Fund (EWU) also scored a death cross last week (see Chart 1).
Chart 1
Many analysts foresee the debt crisis spreading to the UK and this chart does not help assuage that fear. The market cannot point to specifics but it can tell us that something is not quite right with the economy there.
It is no surprise to see problems popping up in any European market. What may give investors pause are death crosses in markets thought to have missed the bulk of the financial crisis now and in 2008.
For example, the iShares MSCI Brazil (Free) Index Fund (EWZ) scored its death cross last week (see Chart 2). Indeed, this market peaked in November of last year and has been in a choppy decline ever since.
Chart 2 
I cannot address the fundamental reasons for the decline other than to say that this is a resource rich country and commodities prices have been falling for months. But when one of the engines of global growth sputters it cannot be good for other stock markets.
An even bigger surprise is the inevitable death cross in the Australian market. Barring a monster rally, the math says that it will occur in the next few days. While there is an ETF for domestic inventors to track, the benchmark ASX-200 index shows a very clear picture on the charts (see Chart 3).
Chart 3
Not only is the cross pending, but the index moved below a major support level - where buyers used to emerge - last month. That means it has already broken down.
In the domestic market, sectors are also starting to succumb and the representation is diverse. Such ETFs as Market Vectors-Agribusiness ETF (MOO), Merrill Lynch Pharmaceutical HOLDRs Trust (PPH) and Select Sector SPDR-Utilities (XLU) all formed death crosses in the past few days.
To be sure, broad market indexes such as the Standard & Poor's 500 have not had similar bearish events. In that light, we cannot conclude that the U.S. has entered a major bear market at this time. But as they say, where there is smoke, there is fire and a lot of industry groups are indeed smoking.
Until stocks prove they have shaken off all the bad news and bad technicals that seem to crop up anew each day, investors should be playing defense.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
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