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Back to Normal

140607Highs

In early May I mentioned that the  conditions of our indicators gave a 60% chance that the sideways consolidation in the S&P 500 Index (SPX) was “normal rotation and profit taking that will result in higher prices when it’s done”. They also gave a 40% chance that an intermediate term top was in the works. In that post I also mentioned that various measures of breadth and risk “will need to break down if the market is going to correct”. These measures held up and SPX moved on to new highs. It looks like the odds played out correctly this time and market internals are getting back to normal…although reluctantly. One thing many bears have been mentioning is the number of new highs on NYSE being very low during May even though SPX was within a few percentage points of all time highs. That condition resolved itself this week. The one sign of breadth that has shown the most weakness over the past month is the ratio between SPX equal weight

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NYSE New Highs Diverging from Price

NYSE Highs Diverging

As we’ve stated in previous posts, the decline from September to November this year did a lot of internal damage to the markets.  We’ve started seeing some of that damage undone in the percent of stocks above their 200 day moving average and also the bullish percent index.  Basically we’re in wait and see mode where it’s time for the market internals to either put up or shut up. We’re neutral on the market with our core market health indicators showing a slight negative bias, but price moving higher which could give us a modestly positive outlook on further strength (ex risk due to our market risk indicator). One thing we’re looking at for confirmation of the recent rally is the new highs on the New York Stock Exchange (NYA). As NYA came out of the November lows there were encouraging signs as the number of new highs rose with price.  They were behaving as we would expect until the last part of November. Over the past two and a

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Nasdaq New Highs and Lows a Concern

One thing that concerns us about the recent rally is the lack of new highs and the increasing amount of new lows.  If you look at the chart of the Nasdaq Composite below with its new highs in green and new lows in red you can see that all is not well with the index. We’re seeing negative divergences when we want to see confirmation of the rally.  An example of a positive divergence happened at the low made in early June.  As the market was breaking to new lows the number of stocks also hitting new lows was decreasing.  At the same time the number of stocks hitting new highs was increasing.  This was a positive divergence that gave hints that a good rally could follow.     Once the rally started the number of new highs and new lows on Nasdaq performed properly for a lasting rally.  Then we got a bad jobs report on 7/6/2012.  You can see in the chart the serious damage the jobs report

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