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'Broken market'? Why there's more trouble ahead

Wednesday, 28 Aug 2013 | 12:23 PM ET
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Prior to Tuesday's action, the mild August drop in the stock market seemed to do little actual structural damage.

But the breaking of some key technical indicators, as well as a swirling eddy of cross currents ahead, indicate that the move lower could be something more than the garden-variety declines that have happened so far in 2013.

The S&P 500 has broken its 50-day moving average, and trading activity in the CBOE Volatility Index shows that market participants are looking for downside protection.

While the stock market rebounded mildly Wednesday, sentiment was growing that trouble was ahead.

Markets try to bounce back
Jeff Kleintop, LPL Financial, and Mark Luschini, Janney chief investment strategist, discuss where investors should put their money amid volatility and Syria worries.

(Read more: 'Time running short' for 'new normal': El-Erian)

In fact, Doug Kass at Seabreeze Partners asserted that the market "is broken technically," even as he has taken a short-term long position. In his morning note, he stated:

The problems behind the market's fall from grace are obvious as well: Syria (most presume the strike occurs in the next 1-2 days), a change in the Federal Reserve's leadership (interestingly it has been observed in press that Yellen has not been vetted), (House Speaker John) Boehner's "whale of a fight" over the debt ceiling, the issue of tapering (how much and when), knock-on effects on emerging market weakness (it's been Net Outflows City!), a potential relapse into crisis in the euro zone, the housing stall, and mixed domestic economic data.

Kass is not alone.

Jeffrey Saut, the chief investment strategist at Raymond James, noted technical danger signs: The break of the moving average Tuesday, and a drop below the 1,639 intraday low of Aug. 21 following last week's Fed meeting, after which investors worried that the central bank may begin reducing its $85 billion in monthly bond purchases sooner than the market wants.

(Read more: Investors: Be cautious as Syria looms)

Saut doubts the 200-day moving average, currently at 1,558, will hold and believes the S&P 500 "has an appointment with the repeatedly mentioned level of 1530–1560."

Both Saut and Kass caution against the temptation to go bargain-hunting just yet.

In a note to clients, Saut said:

I continue to believe the game is not worth the candle, and that the rebuilding of the stock market's internal energy is likely going to be released on the downside into mid-September. This is NOT a time to "buy the dips" IMO! In the intermediate term, stocks look lower even if we get a short-term bounce from the oversold condition.

By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.

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