Trader’s Narrative

Today’s market decline isn’t that surprising when you consider that we walked into the new year with a lot of complacency as shown by option traders’ sentiment. As well, we have the McClellan Oscillators at decade extremes for both the Nasdaq and the NYSE.

Here is another view of the market which points to the same general theme of a market that is feeling toppy in the short term:

This is the percentage of S&P 500 stocks which are trading above their simple 50 day moving average. I use this to measure the state of the market in general. Things have swung yet again to the extreme which we saw at the October 2007 highs. And yet again in May 2008 before the S&P 500 took another tumble.

Within the time frame of the chart, the only time the market didn’t top out when this technical indicator hit extremes was in October 2006. At that time the S&P 500 continued its slow relentless upward pace until late February 2007. But as it kept climbing, there were less and less constituent stocks powering the index higher.

A much more short term view is that of the percentage of S&P 500 stocks above their 10 day moving average:

Right now this is also at an extreme, having swung from zero in October and November 2008 - which by the way has been amazing buy opportunities in the past according to Lowry Research.

But both of these charts provide only a short term view of the market. The percentage of S&P 500 stocks above their 200 day moving average continues to be very low at 3.20%. As it has been since October 2008. Until this number rises, we shouldn’t expect a real rally to be underway.