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Suddenly the mood has turned decidedly gloomy on Wall Street. “Perma-bears” like Nouriel Roubini, Bob Janjuah, Richard Russell and Dylan Grice are now joined by a chorus of hedge fund managers and strategists like Jeremy Grantham, Seth Klarman, Doug Kass, Raoul Pal and Robert Prechter.
And we’re not just seeing the usual grumpy concerned noises emanate from the chorus. There is actually talk of an imminent crash - albeit this originates only from Pal. Honestly though, no one knows if this is the end of the cyclical bull market. No one has seen the future.
More importantly, none of the concerns are new or surprising. The stock market has climbed higher while they have been on full display on the world stage and while analysts and economist have dissected each issue meticulously. But for some reason, the market has decided to falter now.
Last month I was concerned by the fact that the percentage of S&P 500 components trading above their 50 day moving average was, once again, above 90%:
Based on this and other indicators (like the options trading activity and the amount of froth from speculative trading), I do think we are at or very close to a top here. The market may move ahead a bit more but like other times, it will quickly give that all back and more.
Looking again at this breadth indicator, we see that the percentage of S&P 500 components trading above their 150 day moving average is dangerously close to falling below our “box of bullishness”:
I’ve shared this concept several times already but for those who have missed it, it is simple. A cyclical bull market is characterized by the vast majority of stocks trading above their long term trend line. As long as we see the majority of components hold above their long term moving averages, the health of the cyclical bull is intact.
Corrections within the rally come and go but the breadth is sustained at an extremely high level. But when we see the percentage above the long term moving averages crash through the “floor” set by the cyclical bull market, the tone of the market changes. What follows can not longer be considered just another correction within an intermediate uptrend but rather the start of something entirely different.
From the perspective of this indicator, the recent cyclical bull market looks different than the last one. The previous was contained within a tight 90-70% range. This one has been a bit more volatile, containing itself within 90-60% range.
Right now, 58% of the 500 stocks in the S&P 500 index are above their 150 day moving average. That is the lowest percentage since April 2009.
There is also the research into the significance of the 200 day moving average, and how stocks trading above it tend to perform better than those trading below it. Right now 67% of the S&P 500 index components are above their 200 day moving average:
This is another possible double bottom formation since we’ve been down here earlier this month - thanks to the “flash crash”. At best, we can give the market the chance to put in a real double bottom for this indicator and return to cyclical bull market form. At worst, a break below would completely change the tenor of the stock market.
The S&P 500 is barely hanging on by the fingertips above its close after the worst of the sharp down draft on May 7th 2010. But the cumulative advance decline line for the S&P 500 index is now below the corresponding level for May 7th. This implies that breadth is now poorer, even though the S&P 500 index is technically still higher.
As we discussed earlier, on the way up, breadth was either leading the charge ahead of the S&P 500 or at least keeping up with the index. For example, while the S&P 500 index fell below its December 2009 levels as a result of the correction in February 2010, the cumulative advance decline line for the index held above the same corresponding levels.
And in early March 2010, while the S&P 500 was still trading below its swing high, the cumulative advance decline line had already surpassed them. Now we are starting to see the other side of things. So this is another significant change in the tone of the market.
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