There has been little change since the previous technical overview. The market is still marked by a surprising amount of underlying strength hidden beneath a superficial layer of over-extension.
Various breadth measures are continuing to show a broad based rally. The percentage of S&P 500 components trading above their 150 day moving average has inched higher, from 92% at the start of the year to the current 94%. Likewise, the percentage of S&P 500 issues abover their 200 day moving average has gone from 89% to 92%. While these sort of breadth levels are extreme, during a momentum market they can stay at these lofty levels. In fact, one of the signs of a momentum market is this very same characteristic.
The shorter term breadth measure – the percentage of issues trading above their 50 day moving average – is at 84%. I would start to get seriously worried when this moves close to or above 90%. But we still have a tiny bit of room for that to happen.
As well, the cumulative advance decline line for the S&P 500 index itself has been powering ahead at full speed, easily overtaking the index itself:
I’ll brave the threat of sounding like a broken record and repeat that the longer term outlook for the market remains positive but the short term is dubious. A correction is now long overdue. As you’ve probably noticed, the market is now in a 7 week winning streak. We haven’t had a real down day (-1%) in this time period, something that is rather rare.
Perhaps most surprising is that such winning streaks tend to go on for a bit longer. Wayne Whaley wrote recently that historically such periods have been “followed by normal price performance”. And Bespoke (BIG) confirms the same with a similar study showing that historically the following week (8th) has tended to be +0.83% on average and positive 69% of the time. The following month has provided, on average, an additional +1.3% and been positive 72% of the time. So the rubber band may continue to stretch if previous market history is any guide.
One contrary opinion is from Dr. Alexander Elder based on this recent chart comparing the S&P 500 index with the New High – New Low Index:
In case you’re not familiar with this indicator, the New High – New Low Index (NHNL) is a measure of breadth. It is simple to calculate: the daily new 52-week highs subtracted by the number of daily new 52 week lows. Dr. Elder describes the NH-NL index in his book, Trading for a Living (page 194). I highly recommend Dr. Elder’s book if you haven’t read it yet.
As of today’s close, NH-NL jumped to 486 – but it is still trending downward with each upward spike being slightly lower, beginning in November 2010, December 2010 and the latest spike, early January 2011.
In his recent commentary, Dr. Elder explains why this indicator is providing a cautionary signal.
The daily chart of NH-NL shows several troubling developments:
- While the S&P is some 70 points higher today than it was in October 2010, the NH-NL is almost 70% below its October peak
- There is a severe bearish divergence of daily NH-NL, with three lower peaks
- Last week saw a suden expansion of New Lows. Up until now the New Lows remained rather flat, the action was in the New Highs, but now the New Lows are coming to life – a sign of downside leadership
In summary, the US stock market appears poised at razor’s edge. While the trend is clearly up, both on weekly and daily charts, the NH-NL is flashing red warning signs. It reminds us that bull markets do not move in straight lines, and this uptrend is ready for a pause.
The only reason why I’m reluctant to accept this argument is that another measure of new high to new low breadth is not showing the same thing. To show you what I mean, here’s a chart of the ratio of new highs to new lows for the Nasdaq market:
The new high low ratio (new 52 week highs divided by new 52 week lows) is high but just shy of previous levels that marked intermediate tops. Personally, I prefer it because even if the number of issues changes over time, because it is a relative measure, the indicator is still relevant.
What’s your favorite breadth indicator? and what is it saying about the market?