The deterioration of the indicators highlighted below point to a downside break for the late-stage cyclical bull market from 2009, according to BofAML. Should 1,867 decisively give way, the 1820 (October 2014 low) provides additional support but the bigger risk is a top that projects down to 1,600-1,575; and derspite the last 2 days' bounce, volume and breadth suggest a market under distribution or selling pressure, not primed for new highs.
Weakness in Breadth, volume, sentiment, and momentum all lead BofAML to warn "sell rallies" in stocks. Starting 2016 under pressure, the S&P 500 has big support at 1994-1990 but 1965 is the level at which things become perilous. Simply put, holding 1965 is required if a 'bounce' like late 2011 is expected.
The problem of suggesting that we have once again evolved into a "Goldilocks economy" is that such an environment of slower growth is not conducive to supporting corporate profit growth at a level to justify high valuations. Such a backdrop becomes particularly problematic when the Federal Reserve begins to raise interest rates which removes one of the fundamental underpinnings of an overvalued market which was low interest rates. Ultimately, higher interest rates, particulalry in an economy with a deteriorating economic backdrop, becomes the pin that "pops the bubble." It is true that the bears didn't eat Goldilocks at the end of the story...but then again, there never was a sequel either.
"Clients are quick to point out similarities between the current low breadth environment and the narrow breadth regime that emerged during the tech bubble in the late 1990s. Our Breadth index currently equals 1, one of the lowest levels in the 30- year series. The typical episode lasted four months, with past episodes ranging from two months in 2007 to a high of 14 months during the tech bubble."
If one looks at the NDX alone, one would have to conclude that the bull market is perfectly intact. The same is true of selected sub-sectors, but more and more sectors or stocks within sectors are waving good-bye to the rally. Even NDX and Nasdaq Composite have begun to diverge of late, underscoring the extreme concentration in big cap names. Naturally, divergences can be “repaired”, and internals can always improve. The reality is however that we have been able to observe weakening internals and negative divergences for a very long time by now, and they sure haven’t improved so far. In terms of probabilities, history suggests that it is more likely that the big caps will eventually succumb as well.
The first change often occurs below the surface. The deterioration of the market’s internals typically occurs in the lead-up and development of a cyclical market top, but this dynamic too can persist for an extended period. However, eventually these divergences reach a head, and the most egregious cases have historically occurred within close proximity to major, cyclical market tops. The deterioration of the broader market is so great that the resultant foundation of support below the surface of the popular market cap-weighted averages is nearly non-existent. Once the relatively few leaders propping up the market begin to collapse under the weight, the inevitable cyclical decline can commence.
"The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the 'ingredients' for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that 'this time is different.' Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst, they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time."
Another day, another technical breakdown, only this time not for the US but for the entire world. As BofA points out, "the weekly global A-D line shows a 2011-style breakdown", which it notes "is a market risk", although it remains unclear if central banks, and China's National Team in particular, use technicals when deciding to manipulate stocks.
The US equity market struggled last week but the S&P 500 held the rising 200-day MA once again, but as BofAML notes, the much broader-based NYSE stalled at 200-day MA resistance last week. The NYSE has a potential head and shoulders top as well as a breakdown for the NYSE stocks only advance-decline line through the March low. Similar to the NYSE Comp, the Russell 2000 also shows a potential head and shoulders top with a breadth breakdown a big risk to 1200 support...
"The question for 2015 is whether Fed actions are going to take away the liquidity punch bowl, and create a problem for the next rally's ability to achieve escape velocity... We saw this principle of diminished liquidity back in 1998-2000, and again in 2007-08..."
When we first exposed the shockingly dire lack of breadth in US equity markets, it was shrugged off by the mainstream media as yet another 'worry' in the wall to climb. It seems, however, that facts inevitably force their way to the surface and so both Bloomberg (more than 100% of this year’s increase in the S&P 500 Index is attributable to two sectors, health-care and retail. That’s the tightest clustering for an advancing year since at least 2000) and The Wall Street Journal (Amazon, Google, Apple, Facebook, Gilead and Walt Disney Co. account for more than all of the $199 billion in market-capitalization gains in the S&P 500) have been forced to expose the ugly truth about US equities... it is not a stock market - it's a market of 6 tail-chasing momentum stocks.
When we noted the stock market’s weak internals yesterday, we weren’t sure if things could get any worse – and by how much – with the major averages still able to hold near 52-week highs. Well, the answers were “yes” and “a lot”... yesterday, July 20, 2015, was the thinnest new high on record in the U.S. stock market.