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Below are updates this Sunday afternoon on 2 of John’s recent “awareness” charts that don’t exactly give comfort to momentum traders – unless you’re on the short side.

What got the broader equity markets in trouble recently was the sharply declining number of stocks trading above their 200-day moving averages (SMA’s).

John’s multi-year S&P 500 chart illustrates the problem very clearly.  The support band (shaded zone between 40 and 50) for the “SPXA200R” was broken at the end of last week, closing at 37.  That means the percentage of stocks on the S&P 500 trading above their 200-day SMA’s is now at 37%, the lowest level since 2011.   The violation of the support band heightens the risk of a deeper correction, with the downtrend in the SPXA200R strengthening as shown by the ADX indicator.

Best scenario in our view for the coming week would be an immediate further sharp sell-off in this index and other equity markets for “cleansing” purposes, and that could create some interesting opportunities.  The action in the VIX (Volatility Index) suggests something dramatic is building, so hang on to your hats as the ride could be wild.

From a fundamental standpoint, at Friday’s close the S&P 500 traded at 16.1 times analysts’ estimates of the earnings that companies will report over the next year, according to FactSet. This metric, known as the market’s forward price-to-earnings ratio, has fallen over the past 5 months and is now in line with its 15-year average.  It’s still modestly above its 10-year average of 14.1.

The backward looking last-12-months P/E ratio, which compares current prices to the earnings companies actually reported, is sitting at 17.5, above where it was a year ago according to FactSet.  The average trailing P/E ratio for the S&P 500 since the 1870’s has been about 16.6.

HXD S&P/TSX Bear Plus ETF

The HXD (double short ETF for S&P/TSX 60 Index) has broken out of a 3-year downsloping channel.  This is a powerful-looking chart with increasing momentum.  As we warned last Thursday, this is immediately problematic for the TSX which is being pressured by weakening commodity prices (with the exception of Gold, of course).

Look for the HXD to reach into overbought RSI(14) territory (above 70%) and challenge last year’s high around $6.  That would imply at least another 5% haircut near-term for the TSX Composite to about the 12750 level.

It’s Sunday afternoon, trading in China will begin in a few hours.  That market will be fascinating to watch as the new week begins – critical support on the Shanghai Composite is 3400.  Can the “rescue team” keep the Shanghai from breaking below that level?  If they can’t, down she goes – and hard.