The stock market is a market of stocks, and breadth is a key indicator of the market's health. When few stocks advance, while most stocks decline, then breadth is negative. The breadth of the market has been deteriorating recently, while most of the averages have strengthened. A deterioration in market breadth typically indicates the market will decline soon. Intermediate-term technical data (e.g. the VIX 200-day MA, NYSE Oscillator's 50-day MA, SPX to VIX ratio, etc.) indicate SPX will fall below 1,250 at some point within the next month or two. Major resistance levels are 1,310 (daily, weekly, and monthly upper Bollinger Bands) and 1,316 (five-year high). First major support is the low 1,280s (rising 50-day MA, where SPX bounced on the early Jan pullback). However, an "irrational" market episode should be taken into account, where SPX may rise to around 1,350 before falling sharply.

The two charts below are same period daily charts of SPX and SMH. The charts show while SPX rose last week, somewhat similar to the early Jan rally, SMH fell. Semiconductor stocks have some fundamental problems (e.g. stronger competition and lower prices). However, if production and consumption were expected to remain strong, semiconductor stocks would rise. Also, HHH fell from 70 in early Jan to 56 Fri. So, internet stocks underperformed even more than semiconductors. Last week, the SPX chart shows, volume accelerated to high levels, while SPX rose sharply, which indicate that a short-squeeze took place. If enough short positions were covered last week, then profit taking may take place soon.

U.S. consumers have been living well beyond their means, over the past few years, through the Wealth Effects of financial markets (including the housing, stock, and bond markets). These Wealth Effects are financed by foreign capital inflows from the massive U.S. current account deficits, which reached $805 billion in 2005. When there's an economic contraction, consumers attempt to at least maintain the same living standards they had in the economic expansion. Normally, consumers will use savings and then borrow for autonomous consumption. However, currently, the saving rate is low and debt levels are high for U.S. households.

So, U.S. consumers are not well prepared for an economic slowdown. U.S. consumption may stall, which will cause the U.S. current account deficit to shrink and foreign capital inflows to fall. Consequently, the Wealth Effects may disappear and U.S. households may not be able to pay their high debts, and saving may not rise. It's uncertain when and how this adjustment process will take place. However, it could start anytime. Currently, SPX is in the second longest period in history without a 9% or more pullback. SPX hasn't had a correction in over three years. The longest period was 3 1/2 years that ended in Feb 1994. The third longest period was 2 3/4 years that ended in early 1953.

Charts available at PeakTrader.com Forum Index Market Forecast section.