A Caterpillar earth mover moves piles of coal at the Wildcat Coal Load-Out Terminal, owned by Intermountain Power Agency, outside Price, Utah, on Wednesday, March 5, 2014.George Frey/Bloomberg
The road back from the first correction for U.S. equities since 2011 just got another pothole.
Machinery companies became the latest Standard & Poor's 500 Index group to briefly slide under its intraday low on Aug. 25, the day that marked the bottom of the broader gauge's 10-per-cent selloff over four days. For chart watchers, breaching that nadir signals sentiment has shifted and the group, which includes Caterpillar Inc. and Cummins Inc., may be ripe for additional selling. The group is down 0.6 per cent at 9:55 a.m. in New York today, poised for the lowest close since July 2013.
With almost 10 per cent of the S&P 500's constituents now trading beneath their recent lows, analysts see the growing number as a possible harbinger of weakness for the index itself, which pared its advance from Aug. 25 to about 4 per cent following a 1.2-per-cent selloff Tuesday.
"Individual securities are testing these lows all over the place," said Carter Worth, a New York-based technical analyst at Cornerstone Macro LLC. "Now it's starting to show up in some of these aggregate groups, and that's a reason to continue worrying."
Mr. Worth focuses on intraday lows in his analysis of selloffs because a breach means the stock has "gone below a level where anyone else bought" it recently, he said.
Other technical charts are sounding warning signals that the worst of the equities turmoil may not be over. A downward sloping neckline in a head-and-shoulders pattern has formed in the Dow Jones Industrial Average. The gauge and the Dow Jones Transportation Average also breached the low from last October, flashing a so-called Dow Theory sell signal.
The S&P 500 Machinery Industry Index lost 1 per cent Tuesday, giving it a decline of 4.8 per cent over the prior four days. The gauge rose as much as 5.4 percent from its August low.
The group's recent woes can be traced back to investor concern that global economic growth is slowing, particularly in China. Caterpillar, the largest in the sector by market value, generates more than half its revenue outside the U.S. Overseas business makes up almost 70 per cent of revenue for Joy Global Inc., the second-worst performer in the S&P 500 year-to-date.
Investors should brace for more weakness in stocks as the broader market probably will "challenge lows and break them" in the weeks or months to come, said Jim Paulsen, the Minneapolis- based chief investment strategist at Wells Capital Management Inc., which oversees $351-billion.
"The market needs to find its footing, but that's clearly not happening, at least not yet," he said.
A total of 48 members of the S&P 500 have violated their intraday lows from the selloff -- including large caps such as Abbott Laboratories, DuPont Co. and Monsanto Co., according to Worth's analysis.
Among the other S&P 500 groups that have fallen below their August lows are multiline retailers and makers of containers and packaging, sectors that had been in the top one-third of performers year-to-date through July.
"The market is moving for no apparent reason in a downward direction and that's a pretty bearish sign," said Don Townswick, director of equities at Hartford, Connecticut-based Conning Inc., which manages $92 billion. "It's not a violent downward jerk, it's sort of a petering off."