Friday, November 1, 2013

Is the market rally running out of steam?

In my post last Friday, while reiterating that the longer-term market outlook remained bullish in a clearly-defined uptrend, I did mention that some grey clouds were rolling in and a reprieve or pause in the advance would not be surprising. I specifically cited the weekly S&P 1500 New Highs-New Lows Percent, noting when it registered 20 or more it typically indicated an overbought condition with a pullback often ensuing. 

The following chart serves to further (grey) cloud the issue:


In the upper inset is the S&P 500 and in the lower is the 50-day moving average of NYSE stocks making new 52-week highs. Note the unsettling negative divergence. The S&P 500 has been making new highs and yet the 50-day MA of NYSE new highs is lagging, quite dramatically. It's normal for this indicator to be climbing out of a valley or low point when the S&P 500 is just establishing the first new high off an intermediate low (see late 2010 and late 2011 into early 2012, for example). However, YTD the S&P 500 has been in a steady uptrend populated by brief setbacks, and yet since March the 50-day smoothed NYSE new highs has been repressed and downtrending. Similar divergences occurred in 2007 and 2011 with the adverse repercussions to follow being severe. 

I'm not suggesting that we're headed for gloom-and-doom, to sell all stocks and move to cash. I always prefer to wait for price confirmation with regards to any developing divergence. Yet it goes without saying that this indicator bears close watching.

I thought I'd also show the following chart:

The lower inset shows a 10-day moving average of the NYSE up/down volume and in the upper inset is the S&P 500. By all accounts, this indicator appears to behave more as an overbought/oversold oscillator. When the 10-day MA up/down volume approaches 200, the market is extended and thereafter frequently consolidates or retraces, and vice versa at the -200 level. With the S&P 500's recent rally, this indicator has been heading south, further inferring a reprieve is imminent.

Assuming a short-term correction occurs, I would expect the next stop to be the 1700 level, more/less the area of prior highs. But the overbought condition can be worked off via time rather than price, meaning a sideways consolidation could do the job as opposed to a decline. Stay tuned.

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