Split Decision: Market Makes New
Highs as Indicators Say Trouble Lies Ahead
By Joe Duarte for October 9, 2017
I don’t know what to believe anymore as the price charts for the
major indexes say we are in the midst of a never ending bull market.
Yet, a look at the market’s most accurate indicators over the last
twelve months make me wonder if it’s best to head for the exits while
the getting is still good.
There are no Bears Left
Before I discuss the current status of the markets via my weekly
chart analysis, I want to note the 92 reading on the CNN Greed and
Fear Index. This is an extreme greed reading, given the highest possible
reading is 100. The index closed the week just shy of its highest reading
in the recent past of 94. What this means is that the market is due
for a correction as there are almost no doubters left. Another way
to phrase this, is that based on this indicator, there is no one left
to buy stocks.
Market Breadth Falters
I’ve said this many times – the New York Stock Exchange Advance Decline
line (NYAD) has been the most accurate indicator of the market’s direction
over the last several years. Its accuracy has been even better since
the November 2016 market bottom where overbought readings on the NYAD
from the RSI indicator and the ROC indicator marked market pullbacks
in March and July 2017.
A detailed examination of the NYAD chart shows that the same pattern
that preceded the two prior declines in the NYAD and the overall market
is repeating. First, the major indexes made new highs on October sixth
without confirmation from the NYAD, which rolled over. More specifically,
note the extreme overbought reading of the RSI along with the lack
of confirmation of the recent highs in NYAD from the ROC indicator,
which has been weakening for the last couple of weeks, forecasting
some type of pause.
S & P 500 and NASDAQ 100 Indexes Make New Highs
If you were to look at index prices without analyzing coincident
indicators, such as the New York Stock Exchange Advance Decline line,
you would say this market is rolling on all cylinders. Yet, as I showed
above, momentum in the stock market may be starting to falter. And
while it could be early in the game, we may be starting to see a significant
technical divergence developing. A divergence occurs when a handful
of stocks push the indexes higher while the whole market is actually
weakening as is seen when the NYAD is moving lower.
Whether this is what is actually happening currently
remains to be seen, given the overall bullish posture of the On Balance
Volume (OBV) and Accumulation Distribution (ADI) indicators, on both
SPX and NDX, which both made new highs to close last week. These indicators
suggest buyers are still coming into the market.
Putting it All Together
The market is in a tight spot as market sentiment is at a dangerous
extreme of bullishness while the breadth seems to be faltering even
as major indexes make new highs. This scenario suggests we are in the
early stages of what may be a significant market reversal, or at least
a pause in the current long term bull market.
Perhaps the deciding vote on the situation goes to the overall market’s
volume, which as both the NDX and SPX charts show has decreased with
every subsequent new high in the indexes. This suggests that although
the buyers that are currently engaged are quite convinced that prices
will continue to rise, there are fewer and fewer of them that are willing
to take a chance.
Of course, this raises the big question: what is everyone else doing?
There are two plausible answers to this key question. Some are likely
to be standing aside, waiting to see what happens. More importantly,
the rest of the players may be hedging their bets through put options
or short sales, waiting for the market to fall. Either way, neither
group is buying stocks. Therefore at some point, if the number of buyers
continues to contract, even a few sellers will start to push prices
down. The danger in this scenario is that once a few sellers hit the
button, others will follow and the potential for a selling avalanche
Finally, we are just eleven days away from the anniversary of the
crash of 1987. And with a 92 reading on the CNN Greed and Fear Index,
it’s a good time to be very careful in this market, unless of course,
the robots buy the dip and we are off to the races once again.
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