The U.S. stock market cooled off a little this past week on the heels of four consecutive weekly gains. The tech-heavy Nasdaq 100 and small-cap Russell 2000 closed slightly higher, but the benchmark S&P 500 and blue-chip Dow Jones Industrial Average finished the week fractionally lower.

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The S&P 500 has already risen 9.1% since its Brexit low, and my work now suggests downside risk may exceed upside potential in the near term.

Technology was largely responsible for what little market strength there was last week, with the sector advancing 1.4%. Consumer staples, energy and utilities were the worst-performing sectors.

Asbury Research’s own ETF asset flows-based metric shows that the biggest inflow of sector bet-related investor dollars over the past one-month and three-month periods went into health care, which fueled the sector’s outperformance. Since its March 17 low, health care has gained 13.4% — more than double the broader market’s 6.5% gain. As long as these inflows of investor assets continue, I expect this trend to continue.

Texas Instruments Crushes the Market

In the July 11 Market Outlook, I pointed out a bullish breakout in technology bellwether Texas Instruments (Nasdaq: TXN) after 14 months of investor indecision, saying it targeted a 19% run to $75.50. In the three weeks since that report, TXN is up more than 10%, closing last week at $69.75, while the S&P 500 only increased about 2% during that time.

While my $75 target remains intact, Market Outlook readers know there have been several warning signs that the broader market will pull back before it moves appreciably higher and before TXN hits my target.

Seasonality Offers Another Warning Sign

The next chart plots the monthly seasonal trend in the S&P 500 based on data since March 1957, which is when the S&P 500 evolved into its current form from the S&P Composite Index. The red line plots the monthly closing levels in the index thus far this year.

The chart shows a modest one-month seasonal rebound in July, which is historically the seventh strongest month of the year. However, August is the historically third weakest month, while September is the weakest month.

With the stock market seasonally vulnerable to a significant August-September decline, the next logical question might be: How do we know when a decline is beginning? Looking at investor fear may lead us to the answer.

The Volatility S&P 500 (VIX) has been residing below its 50-day moving average since June 30. History shows the S&P 500 tends to rise when the VIX stays below its moving average, which indicates investor complacency. 

Conversely, a sustained rise by the VIX above its 50-day moving average, indicating a significant increase in investor fear, has closely coincided with several recent broader market declines. Accordingly, I would view a sustained rise above 15.42 in the VIX this week as evidence that investors are collectively frightened enough to trigger and sustain a market decline.

Steel Prices Closing in on Upside Target

In the July 5 Market Outlook, I pointed out a buying opportunity in the VanEck Vectors Steel ETF (NYSE: SLX), targeting a move to $33. SLX hit a high of $32.46, up 14.5% since my recommendation. 

As long as SLX remains above overhead resistance at the $30.74 April 20 high, it should help clear the way to my $33 target.

Putting It All Together

In the past several issues of Market Outlook, I have pointed out recent extremes in investor complacency, saying they have historically led U.S. stock market pullbacks and corrections. This week, I showed that almost 60 years of seasonality data also warns of market weakness this month and into September.

However, until proven otherwise, I will view any market decline that emerges over the next month or two as a potential intermediate-term buying opportunity rather than the beginning of a bear market.

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