SuttonWatch.Net: Special Update: U.S. Stock Market

Few would argue with the claim that a "passive" investment strategy, using index funds, has worked best for U.S. stock market allocations over the last five years. The S&P 500 Index has almost tripled from its March 2009 low (+192% to be exact) and the Russell 2000 Small-Cap Index has done even better with a return of 242% since March 2009, not counting dividends.

Maybe the academicians are right? Maybe we should all just pick a broad based index fund and then "buy and hold" forever? From March 2009 to today's close, the S&P 500 Index has posted a 22.67% compounded annual return, plus dividends. Wow! Easy money!!

However, for any investor who doesn't have tomorrow's Wall Street Journal or a working time machine, maybe it's too much to expect that all the market pitfalls over the last 15 years could have been avoided. And maybe it's too much to expect for investors to have had 100% cash in March 2009 and then turned on a dime to become fully invested overnight at the bottom.

In fact, if an investor had bought the S&P 500 in March 2000 instead of March 2009, his compounded annual return would be just 1.65% through today (plus dividends). And along the way, this same investor would have had to suffer through two 50% corrections.

Is there a better way? Yes, but that's a conversation for another day!

So why this Special Update? What can't wait until the weekend when I usually write this column?

Besides the fact that daily chart sell signals were triggered by my computer trading system in almost every major index at today's close, I think there was a meaningful change in the pattern of intra-day trade today. Until today, "negative economic news" was generally good for stock prices AND "positive economic news" was also generally good for stock prices, the best of all worlds for the bullish case. Negative economic news was generally viewed positively by investors because most believed that the Federal Reserve would then keep interest rates artificially low for an extended period of time. Positive economic news was also generally viewed as bullish for stocks for all the usual reasons (better corporate sales, earnings, economic growth, CapEx growth, etc.).

So what's so special about today?

It was reported this morning that U.S. New Home Sales jumped 19% in May to 504,000 annualized units, which shocked almost everyone. The consensus forecast called for just 440,000 annualized units. And the U.S. Consumer Confidence Index jumped to 85.2 today, its highest level since January 2008. The consensus forecast here was just 83.5.

Most U.S. stocks rallied on this positive news this morning (as has been the pattern), but then a major downside reversal unfolded. The CBOE VIX Index jumped to 12.13 at today's close, up 17% from Friday's intra-day low (only 2 trading days ago). Actual single-day volatility jumped to 10.04 today after posting two straight days near 2.0.

Here is the list of major stock index daily chart sell signals at today's close: DJIA, Nasdaq Composite, New York Composite, Russell 2000 Index, S&P 100 Index, S&P 500 Index. And here are the daily chart sector index sell signals: BKX, NDX, QQQ, IWN, XAU, GDX, SIL, MSH, and SOX.

Of course, the only buy signal triggered today was the SDS Pro-Shares double-short S&P 500 ETF!! In the interest of full disclosure, I have a major position in these SDS shares in my managed accounts.

And to add insult to injury for the bullish case today, the Dow Jones Transportation Average is now actually down for the month so far!

The following charts illustrate the bearish outlook for U.S. stocks immediately ahead (lots of Red Dot sell signals):