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.
The correction that began on 9/14/2012 has brought with it some surprisingly similar readings on our market health and risk indicators as the correction that occurred during November of 2010. What makes it eerie is that the November 2010 correction coincided with the QE2 official announcement. Now we’re seeing a sell the news event coincide with the QEternity announcement. Just for fun I’ve posted a chart of the S&P 500 Bullish Percent Index (BPSPX) with illustrations of the similarities. Notice first the divergence from the peak of April 2010 to the peak in November 2010. It looks very similar to the current divergence in that; it sprang from an oversold condition, followed by a strong rally, which culminated in a final burst upward, caused by a Federal Reserve Quantitative Easing announcement. Even the levels in which the BPSPX reached each time are similar. This is somewhat encouraging since the current BPSPX level gives the market room for one more leg higher before becoming overbought. In addition, we’re now seeing momentum
Over the past few weeks we’ve observed the Active Bear ETF (HDGE) outperform a short of the S&P 500 Index (SH). The last time we saw this same behavior starting was in late February and early March of this year. That time period ended up being the last leg in a market rally before an 11% correction. Money flowing out of weak stocks is something we often see as a rally nears a top. This isn’t something that is concerning in itself as the natural progression of most rallies see breadth indicators diverging from price as the rally moves higher. The problem we have now is volatility rising with weak stocks getting weaker. The combination of a thinning market and rising volatility often signals the start of a larger correction. When volatility stays low and actively managed bear funds like HDGE (or weak stocks) begin to fall rapidly we’re not generally concerned as it usually simply shows money flowing out of weak holdings and into stocks that have performed well
As with many of the internal indicators for the market over the past several weeks the Bullish Percent Index of the S&P 500 Index is showing some indecision. This index is one of our favorite broad market breadth indicators because it uses point and figure charts to determine if a stock is in an uptrend or down trend. This method takes much of the ambiguity out of technical analysis. Currently the BPSPX is showing good strength as the market has rallied out of the June bottom. It is increasing in value each week as more stocks enter up trends. This is normal behavior for a sustainable rally that we’d like to see continue. On a daily basis, the BPSPX has been trading sideways for the past several days, which is also normal for a healthy market that is consolidating. We don’t want to see the daily turn down for any extended period of time. One thing that concerns us is the negative divergence of the BPSPX with the value