Over the past few days various measures of breadth have show quite a bit of weakness. As I noted in this post, large market declines come when breadth is already weak. With such weak readings the odds have increased that this decline will be 10% or more. Below are some breadth examples. First is NYSE Advance/Declines. They led the current decline in the S&P 500 Index (SPX). Small caps are especially sensitive to this condition. Next is the Bullish Percent Index (BPSPX). It currently has less than 60% of the stocks in SPX with bullish point and figure charts. This indicates a significant number of stocks in down trends. Last is the percent of stocks in SPX that are below their 200 day moving average. Nearly 50% of SPX stocks are below their 200 dma. With all three measures of breadth showing significant weakness, a signal from my market risk indicator should be taken seriously.
A few weeks ago Urban Carmel at The Fat Pitch wrote a post that concluded that the NYSE Advance / Decline line (NYAD) was a poor timing indicator. I generally agree with his assessment. I think that most measures of breadth by themselves are poor timing indicators. Markets can fall when breadth is healthy and breadth often diverges at market tops for a very long time before the market actually falls. For example, the Bullish Percent Index (BPSPX) and the percent of stocks below their 200 day moving average have been diverging with the S&P 500 index (SPX) for over a year (or two depending on how you count). The fact that breadth isn’t timely is why I don’t use it as a part of my “core” indicators. Instead, you’ll hear me refer to various forms of breadth as ancillary or secondary indicators that give good background information. So what information does it give? Answer: When breadth is poor the odds increase that a decline will be large. If breadth
There really isn’t anything significant happening in market internals lately. From all appearances the market wants to go higher, but probably needs to consolidate a bit before another rally. If the market dips keep an eye on breadth to see if anything changes from bullish to bearish for early warning of a significant decline. Here’s an update of some of the breadth measures I follow. They all have healthy readings, but with a few nuances. The NYSE Advance / Decline line (NYAD) is confirming the recent move to new highs. This is the most healthy sign of breadth I’m watching. Breadth between the most bullish stocks on Twitter and StockTwits and the most bearish stocks is also showing readings that are consistent with a bullish trend. However, it is now at levels that have often preceded a short term decline. The bullish percent index (BPSPX) has historically strong readings above 60%, but is down from the giddy readings during the rally in 2013. The highs over the past six months
I’ve stated several times over the past year that breadth must deteriorate for the market to fall substantially. In mid July I pointed out the weakness in the ratio between the S&P 500 index (SPX) and SPX equal weighted (SPXEW). When it falls below its 20 week moving average it is often a sign of choppy markets to come. The market rallied after SPXEW’s initial failure, but during that rally SPXEW only made it back to the underside of its 20 week moving average then turned back over again taking the market with it. This is a great example of how tops are a process, not a single event. I’m not suggesting that we’ve seen the top, but wanted to point out how much time it takes for one indicator after another to weaken, then fail, before a top is actually in place. Tops usually take several months and are often fraught with whipsaws in our indicators (and portfolio allocations) before the weight of selling causes a severe down turn.
Our core measures of risk are very close to going negative. If they make it below zero by Friday we’ll be raising more cash and/or adding a larger hedge. Our measures of market quality and strength are also falling, but they’ve got a bit more room before going negative. With that said, the market is due for a bounce so conditions could change quickly. I’ll do a post on Friday well before the close with any changes to our portfolio allocations. This decline is different in nature than the previous two this year in that it appears to be more about portfolio positioning for the longer term than fear (of any kind). The most sensitive components of our Market Risk Indicator aren’t being severely impacted while the slow moving components have rounded out tops and moved below zero. Our core measures of risk (that are completely independent of our Market Risk Indicator) have mostly been diverging with price since the end of last year and are now close to going
It’s looking like the market is ready for a bounce. The nature of any bounce will tell us whether we should expect new highs or if the rally will fail. Here are some of the critical charts I’ll be watching over the next week or two. A chart I show often when the market is starting a move lower is the ratio between near term volatility (VIX) and mid term volatility (VXV). Spikes in this ratio show immediate fear is greater than longer term fear. They are usually associated with an event or a sudden recognition of danger by many market participants. When the market bounces out of a short term low this ratio can help us determine if near term fear is subsiding or lingering. Over the next few weeks we want to see it fall below .9 to give the all clear signal. If it can’t move below that level the odds favor more downside ahead. This indicator couldn’t clear the warning two weeks ago and signaled that
Over the course of this year I’ve been consistent in repeating that I didn’t think the market could suffer a correction unless breadth broke down. Even though many other indicators have warned on and off this year, breadth has held strong. This week the picture changed a bit. First let’s look at the breadth indicator that warned first. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) warned in early July when it broke below its 20 week moving average. It turned back up this week but as a result of large caps selling faster than small caps. When a ratio turns up I like it to result from upturns in the numerator and denominator so this upturn isn’t exactly positive. The NYSE Advance/Decline line (NYAD) is currently experiencing its largest decline in a year. This indicator shows that since the first of July there has been broad based selling as more stocks are declining than advancing. Other declines in the market this year
Over the next couple of weeks the market will be forced to choose a direction. The S&P 500 Index (SPX) is being squeezed between its 50 day moving average near 1860 and its last peak near 1900. Each day that goes by the 50 dma will move higher and put more pressure on the index. The pressure will force SPX to either move higher or fail at its 50 dma so we should get a direction over the next few weeks. Coincidentally, support and resistance levels gleaned from the Twitter stream are compressing in the same range. There are a few scattered tweets down near 1850, but the majority are near 1860. Above the market the most tweeted level is near 1900. This tight range suggests that traders are watching closely for a break before committing themselves. Quantified messages from the StockTwits community issued a consolidation warning for SPX Friday at the close. Please note, this isn’t a prediction that the market will move lower, merely warning that sentiment and
By almost all the measures I track it’s make or break time for the market. I’m seeing a pattern in both core and ancillary indicators that has often marked lows in the market over the past few years. Each time our indicators were close to signalling an extreme warning the market promptly turned back up and resumed the rally out of the 2009 lows. Over the longer term when our indicators have reached these levels the market rallied 35% of the time and had an extended decline or choppy period 65% of the time. As you know, I can’t see the future so all we do is go with the odds. As a result, our core portfolios raised cash and/or added a hedge yesterday. Here are some highlights of things I’m seeing that makes me cautious. The ratio between near term volatility (VIX) and 3-Month volatility (VXV) is currently rising as a result of both VIX and VXV moving up. This is a condition that has only occurred a few
Over the past week the rotation out of the most loved and momentum stocks into value stocks continued. The rotation is causing internal damage to our core indicators, but our measures of risk aren’t showing any fear. This paints a picture of market participants simply taking profit on the stocks in their portfolios that had the largest gains over the past year. Any fear appears to be limited to the high flying stocks, not the market as a whole…yet. I’m seeing a lot of warning signs which suggest caution, but not aggressive action. The percent of stocks in the S&P 500 Index above their 200 day moving average has recovered from its early February dip and is holding steady near the 80% level. However, a look at individual charts shows many stocks painting bearish flag patterns just above their 200 day moving average. General Electric (GE) is a good example. The number of new highs on NYSE diverging from the market shows that a significant number of individual stocks (like