At least 6 signs show the stock market is starting to break down

On Jan 20, 2022

Strap in! It could be a bumpy ride this year.

Financial markets are off to a woeful start for the bulls in 2022. Blame surging inflation, an out-of-step Federal Reserve, or a nagging pandemic. But whatever boogeyman market participants identify, there are clear signs that the market is experiencing signs of wear and tear.

Here are a few market-based indicators that imply more bumps in the road ahead, or at least highlight the uneven path of market traversed thus far.

Tech wreck

The Nasdaq Composite
COMP,
-1.15%
has been in a downward spiral. The popular technology index on Wednesday logged its first close in correction territory since March, closing 10.69% below its Nov. 19 record peak and meeting the commonly used definition for a correction.

On top of that, the Nasdaq Composite on Tuesday notched its first close below a closely watched, long-term trend line since April of 2020—its 200-day moving average. The breach of its 200-day may be a more compelling cause for concern for optimistic investors, given how long the index was able to stay above that level.

Death cross for the smalls

The small-capitalization focused Russell 2000 index’s 50-day moving average fell below its 200-day moving average. A “death cross” appears when the 50-day moving average crosses (DMA) below the 200-DMA, which many chart watchers say marks the spot a short-term pullback graduates to a longer-term downtrend.

Small-caps, as measured by the Russell 2000 index
RUT,
-1.60%,
have fared almost as badly as technology shares, down 8.1% in the year to date.

According to the folks at Dow Jones Market Data:

Since inception, the Russell 2000 has entered into a death cross twenty-six times, including Wednesday’s entrance
The average amount of trading days the 50-day moving average stays under the 200-day moving average is 104 trading days
In 2020, the index spent 103 trading days with the 50-day moving average below the 200-day moving average

The S&P 500’s 100

The S&P 500’s midterm moving average, its 100-day, was breached on Wednesday. The broad-market index hasn’t closed below that level since around October of 2021. Falling below that mark now may signal that the 200-day trend line may be next to fall.

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