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Chasing a Thinning Market

Our Twitter sentiment indicator for the S&P 500 Index (SPX) cleared its consolidation warning today at the close.  The pattern being painted by smoothed sentiment looks like chasing by market participants as it is simply following price and throwing whip saw signals.  This is further confirmed by daily sentiment printing very high and very low readings when price reaches highs and lows respectively.

What we’ve seen lately is traders piling on just as the move is ready to fail (another sign of chasing). We’d rather see high daily prints at the beginning of an upward move or low daily prints near highs as this would show enthusiasm or anticipation near turns.  At the same time price is painting a megaphone (broadening top) pattern which is another sign that market participants are uncertain in their actions.

 

 

The chasing is occurring with fewer stocks fueling rallies.  The percentage of stocks in the S&P 500 Index above their 50 day moving average have been diverging since February.

 

The bullish percent index which tracks stocks with positive point and figure charts started diverging at the first of April.

 

Stocks above their 200 day moving average is seeing divergences as the market is now back near all time highs. Although this divergence is coming from a very high level of over 87% so it’s not to concerning yet.

 

New highs on both NYSE and Nasdaq are diverging as well.

 

For further evidence, take a look at your own portfolio and see how many stocks are confirming the new highs by breaking out or holding above their 50 day moving average.  In addition, take note of the stocks that seem to be breaking down or showing weakness by not recovering above their 200 day moving average.  Often times by paying attention to your personal portfolio you can get a good sense of the broader market.

Long story short, traders are chasing a thinning market.  We suspect there is still enough fuel in the tank to push SPX to higher prices.  However, we want to see those higher prices accompanied by better breadth or the broadening top pattern will become unstable.  As we’ve mentioned before, this is a time to be cautious.  Give less leeway to your lagging stocks and be willing to raise cash as the market moves higher.

 

 
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