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Canaries in the Coal Mine

The market broke above the important 1525 level today, but did so with a few warning signs.  We’re still seeing negative divergences as the market moves higher.  This doesn’t mean that the market is going to fall in the immediate future. However, it does warn that we’re seeing a slow move away from bullishness towards caution by portfolio managers.  Below I’ll highlight a few things we’re seeing and explain what we think it means. The first chart is new 52 week highs on NYSE.  The S&P 500 Index (SPX) has moved higher since the beginning of the year.  At the resolution of the Fiscal Cliff issue the market ran sharply higher for two days.  At that time new highs on NYSE spiked to nearly the same level they had achieved last September (when price was trading at about the same level…so far, so good).  Today price is almost 5% higher, but new highs are lower, causing a negative divergence that has lasted for over six weeks.  This is one of

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Market Internals Encouraging

Stocks above 200 DMA vs. SPX

At the end of October we posted about the divergence between the S&P 500 Index (SPX) and the percent of stocks above their 200 day moving average in the index.  We warned that once more than 40% of stocks fall below their long term average the market often accelerates to the downside.  We got that sell off.  Once the percent stocks below their 200 dma broke the 60% level the market had a broad based sell off as evidenced by the indicator quickly falling below the 45% level. Now the market is rallying.  With the rally we’re seeing some encouraging signs from some of the internals. We’ve updated our chart of the percent of stocks above their 200 dma as an example.  Notice, that the chart pattern for the decline and subsequent rally in SPX is mirrored by stocks above their 200 dma.  This tells us that the rally is as broad based as the decline was, which is an encouraging sign. Over the next several days this indicator will

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Stock Above 200 Day Moving Average Give Warning

Stocks above 200 day moving average

Just a quick note today.  The percent of stocks in the S&P 500 Index (SPX) above their 200 day moving average broke below a critical point.  Over the past several years once more than about 40% of stocks break below their 200 day moving average the market starts to accelerate downward.  This is usually a result of traders finding many more shorting opportunities.  So the next bounce in the market should be watched carefully to see if this indicator can recover.  If it doesn’t it means that traders are shorting as stocks rally back to touch the underside of their 200 day moving average. In addition, the Bullish Percent Index for SPX is starting to break down too.  So not only are stocks breaking their 200 day moving average, many stocks are also breaking bullish chart patterns.  Once the scales get tipped the market generally moves fairly quickly downward.  

 
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Market Internals Continue to Weaken

S&P 500 stocks above 200 day moving average chart

From the middle of September to the middle of October the S&P 500 Index (SPX) traded largely in a range.  During this time we hoped that market internals would hold up signalling a healthy consolidation.  The first trip down from 1375 on SPX didn’t do much internal damage.  However, the rally back up and the subsequent sell off brought with them diverging internal indicators.  These divergences served as a warning that the support range of 1420 to 1430 might not hold. As an example, take a look at the percent of S&P 500 stocks above their 200 day moving average in the chart below.  The first decline from 1475 to 1430 in SPX brought the percent of stocks above their 200 DMA lower, but not to an extent that caused concern.  On the following rally it was evident that many stocks could not regain their 200 DMA.  This served as our first warning that traders were now selling many of those stocks as they bounced back toward their moving average.  However,

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S&P 500 Stocks Above 200 DMA Promising

One of the things we look for in a healthy market is broad participation by many stocks.  Gauges like the Bullish Percent Index, the number of stocks making new 52 week highs, and the percentage of stocks above their 200 day moving average are all good indicators of market breadth. Recently the number of S&P 500 stocks above their 200 day moving average showed some promising signs.  In the chart above, notice that stock above their 200 DMA did not confirm the move higher in the S&P 500 Index coming out of the June lows.  From mid June till early August the chart traded sideways even though SPX was trending strongly upwards.  The early move in price was against a wall of worry where many stocks lagged the market as a whole.   The sideways movement in the number of stocks participating strongly in the rally stayed low as market participants bought quality or safe stocks rather than a broad number of securities.  It showed that people were still worried

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