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A Subtle Shift In The Balance Of Power at Trader’s Narrative

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”:

SPX percent above 150 MA May 2010

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:

SPX percent above 200 MA May 2010

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.

Cumulative Breadth
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.

SPX compared to cumulative breadth
SPX cumulative breadth May 2010
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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13 Responses to “A Subtle Shift In The Balance Of Power”  

  1. 1 jezza

    On the 11th technical analysis discussed why equity prices could lead us higher, 9 days later and 500 points lower you would like to discuss why equity prices could lead us lower-there also appears to be a subtle shift in your position too.

    The material on breadth is very interesting-wish you could be more consistent re interpretation.

  2. 2 jb

    jezza, what are you 12 years old? You really shouldn’t be trading?

    You think views can’t change in 9 days? 9 frikkin days is a lot of time dude.

    And, subtle change has been the A/D plunge below the previous low (everything else can be termed as forming a potential bottom). When do you think the A/D plunge happened? Before the last 9 days?

  3. 3 jezza

    jb, the economic situation did not warrant a bullish stance 9 days ago is my view even though the market rallied from a over sold position.

    A/D should not be the only determinate of bullish or bearish, and many other factors, both technical and fundamental should be considered.

    The breadth discussions are interesting and enjoyable to read-but the conclusion can be slightly confusing at times.

    Glad I am not trading the Indices!

  4. 4 Rod

    Big, big congratulations to Matt Claassen for his April 30 research piece, “Thoughts on the intermediate trend”, reproduced in this blog.

    Can’t quote exactly, but something along these lines: The experience of secular bear markets shows that the top is often an inverted V (not a long, rounded formation) and it comes without warning from breadth indicators. Ex. A: Japan, Ex. B: The 1966-1982 Secular Bear.

  5. 5 Samuel

    Yep, that Claassen article was brilliant.

  6. 6 Sharpe Trader

    The Claassen article was brilliant but I think it’s too early to presume that this cyclical bull market is over. At least let’s see the market take out its Feb. lows before dismissing the bulls.

  7. 7 Jimmy

    Kudos to QuantDNA too, even though it’s forecast was in mid March it did warn about a market tumble.

    QuantDNA made a warning. Claassen said it could happen without a warning from breadth indicators.


    Babak - great info, I am big admirer, as u know.

    Just my 2 cents

    Any chance of pinning your colours to your mast a bit more clearly though?
    Currently you are posting 5 sources of opinion / TA.


    While all are eduational, in conditions like the last week, I find they constitute information overload, unless u r prepared to clearly state your position, as opposed to pulling out a quote, after the event, which shows what the market was going to do.

    [Constructive] critisism of Wayne [Bull] & Claasen [Bear] - with their credentials, I think they should not be relying on data from the 50s / 60s onwards. Think it is a mistake not going back to the 20s. Wayne is most vulnerable in this regard as 50s has a strong bullish bias.

  9. 9 OntheMoney

    Paul -

    It’s a little unfair to demand that Babak ‘pin his colours to the mast’. At most tops, the information is contradictory, often for quite a while, and a sensible investor will keep their options open. The Dow took a year to break down in 2000 and featured huge swings either way. If you’d been inflexibly bullish or bearish you’d probably have lost money in the whipsaws. Same could happen here.

    Taking out long-term protection, or going to cash and trading the short-term swings means you can wait for the market to tell you which way IT wants to go - AND make money.

    And isn’t that what we’re all here for?


    Dear - OntheMoney

    Try rereading my post - very slowly…….

    “It’s a little unfair to demand that Babak ‘pin his colours to the mast’.”

    I demand nothing - Babak provides a wealth of useful information - with grace - that is rare.

    “At most tops, the information is contradictory”

    Thanks for that - I’m talking about neither tops or bottoms, but about delivery

  11. 11 OntheMoney

    Paul I stand admonished and will re-phrase:

    It’s a little unfair to ‘ask’ that Babak pin his colours to the mast.

    Your questions suggest that you were wondering, along with everyone else, whether the market has indeed topped - which is the implied subject of this post. Maybe Babak hasn’t made up his own mind and, commendably, doesn’t want to lead his readers down the wrong path. Time to make your own bed, as they say, and lie in it.


    “I stand admonished”
    Feel free to admonish yourself if that is your wish

    “It’s a little unfair to ‘ask’ that Babak pin his colours to the mast.”

    It’s unfair to offer feedback ?

    “Your questions suggest that you were wondering, along with everyone else, whether the market has indeed topped”
    Suggest to you……… I offered feedback on delivery.

    Try rereading my post - very slowly……

  13. 13 Babak

    Paul, thanks for the kind words. About pinning colors to the mast, I’m reluctant to do so for a few reasons, one, things are very fluid and by the time I’ve analyzed and written something, it could very well change. Then I would feel responsible to update asap, etc. Second, I’m hesitant to take on the role of an “advisor” due to legal implications. Finally, it isn’t that difficult to read between the lines, for example, back on May 1st (over the weekend) before the S&P 500 closed above 1200.

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