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Investors gird for a loss of traction

The stock market's apparent invulnerability came to an end on Friday -- snuffing out 11 straight weeks of the Dow Jones industrial average closing higher for the week. That's representative of just how complacent investors had become because bidding stocks up ahead of the weekend is a vote of confidence. That's especially true in the context of all the geopolitical tension in Ukraine, Gaza and elsewhere.

How else can you explain the speculative frenzy and pure momentum-chasing that has been on display lately, from the pump-and-dump in Cynk Technology (CYNK) to the recent outperformance of the most heavily shorted stocks in the market?

This "dash for trash" boosted the overall market by forcing bears to cover their positions, but it also gave an impression for those that cared to look that the seemingly unstoppable rally was increasingly becoming one of low quality.


The aura of invincibility was broken after Dow closed below its 20-day moving average in a meaningful way for the first time since May, dropping below the vaunted 17,000 level in the process. Small-caps suffered even more, testing back down to their 200-day moving average.

But it's the drop in the Dow that likely nagged investors this weekend as the euphoria that has held the market up this summer looks set to fade ahead of what will be a very busy week.

Things will pick up starting on Wednesday, which will feature both the initial reading on second-quarter GDP growth (which will be key after a disappointing first-quarter performance) as well as the latest policy announcement from the Federal Reserve (which is on track to end its QE3 bond-buying stimulus in October). And we have the July jobs report on Friday, and a strong reading would bring forward estimates of the Fed's first short-term interest rates hike into early 2015.

Earnings season continues as well with a calendar heavy with energy names like Exxon Mobil (XOM) and Chevron (CVX). Among the other highlights is Tesla Motors (TSLA) on Thursday.

With so many catalysts in play, the low volatility that investors have been enjoying is set to end. You can see this in the way the CBOE Volatility Index (VIX), known as Wall Street's fear gauge, is pushing higher. The 20-day moving average has now made an upward cross of the VIX's 50-day moving average, a sign of increased market nervousness that hasn't been seen since January.

Investors seem to be preparing for a correction in a real way for the first time in six months.

This confirms evidence that the market wasn't as strong as it appeared on the surface. Market breadth -- a measure of how broadly stocks are participating to the upside -- has been weakening for weeks. The percentage of NYSE stocks above their 50-day moving average has dropped to around 60 percent from a peak of more than 83 percent at the start of July.

To be sure, we're overdue for a pullback: The market hasn't suffered a significant correction since 2011. This week could be sign of what's in store.