Here are a few things I’m currently watching to provide more early warning that the current draw down might get serious. The Cumulative Advance Decline line (NYAD) is probably the most important since it has provided good guidance all year. Remember when everyone was calling a top in September because of the negative divergence? I pointed out that it was painting a triangle and that the break would point the direction for the market. NYAD broke higher and the market rallied. Now NYAD is starting to roll over in a more serious way, however, it is still above the trend line created from the bottom of the previous triangle. As long as it stays above that level and the previous two valleys the market will most likely catch and drift higher into the end of the year. A break below those levels will get me concerned.
As a side note, there are now several people mentioning the percent of stocks above their 200 day moving average diverging from price and predicting a market top. As I’ve mentioned a hundred times before, as an intermediate term investor I don’t worry about the percent of stocks above their 200 dma until it gets below 60%. It is currently at 77%, which is historically a high number so not too concerning yet.
Back to signs of concern, I mentioned this chart at the first of December as our first early warning sign. In the past when the ratio between the S&P 500 index equal weighted (SPXEW) and the S&P 500 index (SPX) has fallen below its 20 week moving average it has signaled a top. This ratio needs to get back above the 20 week moving average to clear its current warning.
The last chart is a the ratio between 1 month volatility (VIX) and 3 month volatility (VXV). When this ratio rises it means that near term volatility is being bought more aggressively than 3 month volatility. This signals investors are more concerned about a decline in the near term. This ratio is currently at a point that has often marked the bottom of a dip in the market or an acceleration of the selling. If it closes above 1.0 on a weekly basis I’ll get very concerned. If it can move back below .9 it will signal that the market will most likely move higher.