While the major market indices
have been treading water recently, several indicators are flashing
warning signs of a major market decline.
When it comes to bull markets,
broad participation by individual stocks is necessary to supply the fuel
for the rally. When the health of the rally weakens, it is possible for
a few big stocks to continue to drive the major market indices up,
while increasing numbers of smaller stocks suffer declines. This occurs
at all major market tops.
There are approximately 2,800
companies listed on the New York Stock Exchange, and there are several
measures to examine what’s happening under the proverbial market hood.
The NYSE advance-decline line,
or “market breadth," is a running total of the total stocks on the
exchange that closed up for the day minus those that closed down.
Looking at a weekly chart of the S&P 500 index, we see the rally
that commenced in 2009 has been contained in a healthy upwardly-sloping
trend channel.
However, the blue NYSE
advance-decline line itself just broke its trend channel to the
downside. Accordingly, this demonstrates that fewer and fewer stocks
have been participating in the bull market rally since the peak of the
indicator that occurred in May, 2015.
Another method of examining
market internals is to measure the number of stocks that are making new
52 week highs. As would be expected, a healthy rally is concurrent with
many stocks making new highs for the year.
This indicator is very volatile,
so a smoothing factor of 200 days is applied. The downward trend since
mid-2013 is apparent, and the recent breach of the blue support line
indicates that the health of the current bull market is in jeopardy.
Finally, the number of stocks
that are trading below their 200 day moving average is another gauge of
overall market weakness. The higher the number (below, green), the more
stocks are trading below their critical 200 day moving average support
line.
During the market panic of
August, 2015, this indicator broke above the red resistance line created
in late 2012, flashing warning signs. If it crosses above this line
again, it would signal extreme duress in the markets.
While market fundamentals
typically dominate the headlines, market internals are oft-overlooked
indicators that can give investors a heads-up when to be on heightened
alert. Currently, we are seeing the most weakness since the commencement
of the 2009 secular bull market.
By: Jared Blikre.
For The #FacebookTeam