This page has been archived and commenting is disabled.

Bull Market Dealt A Significant Blow?

Tyler Durden's picture




 

Via Dana Lyons Tumblr,

In January, we wrote a post titled “Are Bears Missing The Forest For The Trees?”. The gist of it was that while there were certainly concerning bits of evidence piling up regarding the longer-term fate of U.S. stocks, the most important factors in the immediate-term – such as the continued confirmation of new highs by the NYSE Advance-Decline Line – continued to support the bull market. That may be starting to change.

Regarding the NYSE A-D Line, we noted last week that for the first time in awhile, it failed to match the new highs set earlier this month by the S&P 500 and other large cap indices. As a refresher, the A-D Line is a cumulative total of daily advancing issues minus declining issues on the NYSE. In our view, it is an important gauge of the health of the stock market as it measures the level of strength among all stocks. The more stocks there are advancing, the more robust and resilient a rally is likely to be. Therefore, when the A-D Line failed to confirm the new high in the indices, it was an indication that fewer stocks were still participating in the rally.

Yesterday, we saw more confirmation of that. The UP trendline of the NYSE Advance-Decline Line since the beginning of the cyclical bull market in 2009 was broken to the downside with yesterday’s poor breadth.

 

 

Now, a few things about this development. Yes, it is only a measure of the internals of the stock market, rather than price itself. A break of the long-term price trend would obviously be of more concern. However, just as the indicator has peaked before cyclical market tops in price, a break in its trend has also been a harbinger of downturns in price during the prior 2 cyclical market tops.

 

image

 

As the chart shows, trendline breaks in the A-D Line coincided with market tops in the Value Line Geometric Composite in 1998 and 2007, each leading to cyclical bear markets. As we’ve mentioned in the past, the Value Line is an unweighted average of roughly 1700 stocks. So while you may note that the major averages did not top out until 2000 in the former instance, the majority of stocks did actually peak in 1998. Therefore, unless one was invested just in large-cap growth stocks, they were likely impacted negatively during the 1998-2000 period. The same story applies today. While the S&P 500′s uptrend may still be intact, it does not mean that the broad market of stocks is in as healthy a position.

A few notes about trendlines and their utilization. As we have stated in the past, trendlines are one of the misused of all charting tools. For one, our rule of thumb is that there must be at least 3 points of contact in order for a trendline to be valid. A line can arbitrarily be drawn between any 2 points. It is that 3rd touch, however, that renders the trendline connecting the first two relevant. Thus, a break of that line means a genuine change of character. In this case, the trendline connecting the 2009 low and the October 2014 low proved relevant, i.e., provided a bounce, at the December 2014 low as well as the low earlier this month. Therefore, yesterday’s break of that trendline marks a change in character.

Here is another pet peeve with the use of trendlines. Often times, when a trendline is broken, folks simply draw a new line wherever the new low happens to be, as if there was no significance whatsoever to the original line. A new line may be appropriate but if one isn’t going to respect the break of the original line, why bother even drawing it. This is especially true if one is going to continue to draw more and more new trendlines with each successive trend break. Thus, it is important to be honest about one’s use of trendlines. Either respect their signals or do not use them.

Lastly, as a trendline persists, it is not uncommon for prices to begin to touch the line with more frequency. This is a sign of a weakening trend and a head’s up that the trendline is more apt to be broken. That is the case with the NYSE A-D Line. The trendline had been tested several times in recent months, increasing its vulnerability to a break. Another way of looking at it is that, trendline aside, the slope of the price series is getting shallower. Note that since the October touch of the trendline, the A-D Line’s ascent has been much less steep than it had been during most of the post-2009 period. This is merely indicative of a trend that is losing strength.

Over the past year and a half or so, we have nit-picked the equity rally quite a bit. That said, those forces most vital to the perpetuation of the bull market have been pretty steadfastly positive. One such force has been the NYSE Advance-Decline Line. However, following its divergence at the early May equity high and now yesterday’s break of its post-2009 up trendline, the A-D Line looks much less constructive for the market. Thus, while we previously cautioned stock market bears to focus on the forest rather than the trees, this is one falling tree that might make a sound.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 05/28/2015 - 08:10 | 6139358 Headbanger
Headbanger's picture

You ain't seen nothing yet!

CAUSE THEY KNOW NOTHING!

https://www.youtube.com/watch?v=TaKnDMv6ceg

Thu, 05/28/2015 - 08:13 | 6139366 rcintc
rcintc's picture

Of course, that's a bullish sign now.....

 

/sarc off

Thu, 05/28/2015 - 08:14 | 6139370 Headbanger
Headbanger's picture

Hers comes the tsunami..

"Wow.. Look at that.."

https://www.youtube.com/watch?v=zMb6s6ks1_g

DUHHHH!

Thu, 05/28/2015 - 08:22 | 6139390 XAU XAG
XAU XAG's picture

Just lower that line a little................and you will then get a bounce off it!

Thu, 05/28/2015 - 08:14 | 6139369 This is it
This is it's picture

The charts will rise and it doesnt care about any lines anyone draws. Period.

Thu, 05/28/2015 - 08:15 | 6139373 Chuck Knoblauch
Chuck Knoblauch's picture

There is no market, Neo.

Thu, 05/28/2015 - 08:17 | 6139375 Achilles Heel
Achilles Heel's picture

A - D < 0 = QE18

Taught at the finest economics schools

Thu, 05/28/2015 - 08:17 | 6139377 yogibear
yogibear's picture

They have everyone BTFD.

Thu, 05/28/2015 - 08:20 | 6139386 valley chick
valley chick's picture

Abercrombie loss 63 million and stock is UP in after hours. Just BTFD !

Thu, 05/28/2015 - 08:29 | 6139407 VinceFostersGhost
VinceFostersGhost's picture

 

 

63 trillion I can wrap around my head, but 63 million, there's just no way.

Thu, 05/28/2015 - 10:36 | 6139858 Yancey Ward
Yancey Ward's picture

$63 million?????  Jeez, that is nothing!  I bet Warren Buffet has lost that much in his sofa.  BTFD!

Thu, 05/28/2015 - 08:27 | 6139400 CarpetShag
CarpetShag's picture

Here's a better Tumblr site

http://forhereyesonly.tumblr.com/

(courtesy "slewie the pie-rat" no idea where he went)

Thu, 05/28/2015 - 08:33 | 6139415 buzzsaw99
buzzsaw99's picture

if you don't know yellen you don't know jack shit

there is no market there is only old yeller

Thu, 05/28/2015 - 08:36 | 6139421 heisenberg991
heisenberg991's picture

Just buy AAPL and all is well.

Thu, 05/28/2015 - 09:03 | 6139483 BringOnTheAsteroid
BringOnTheAsteroid's picture

Is this like the Hindenburg Omen?

Thu, 05/28/2015 - 09:53 | 6139682 christiangustafson
christiangustafson's picture

The last confirmed Hindenburg Omen signal in September 2014 presaged the October decline -- where the 10Y yield CRASHED, FFS.

I'll be very interested in any HOs triggered in the next two weeks.

Latest Three Peaks / Domed House SPX count, portends of doom, chaos, cannibalism etc etc.

GLTA

Thu, 05/28/2015 - 09:57 | 6139698 saveUSsavers
saveUSsavers's picture

looks like one could trigger today see 2nd to last chart, http://stockcharts.com/public/3828047/tenpp/3

Thu, 05/28/2015 - 09:59 | 6139710 christiangustafson
christiangustafson's picture

Sweet. 

HOs + A/D divergence + teh Trannies (Dow theory non-confirm) + a wicked ending-diagonal, all makes for good times and a Bear revival.

Thu, 05/28/2015 - 09:27 | 6139556 crackpuff
crackpuff's picture

If you think this bitch has been delt its final blow you're smoking better crack than I can find on my corner. One of only 3 things are going to do it: 1) hiking interest rates. 2) Dollar tanks and people pull out when enough people see QE infinity in the works. 3) Inflation combined with low demand causes a shitfest (see number 2). Everything else is just counting turds while wading through a sewer

Thu, 05/28/2015 - 09:31 | 6139573 MATA HAIRY
MATA HAIRY's picture

BULLISH

Thu, 05/28/2015 - 10:04 | 6139734 Orwell was right
Orwell was right's picture

If I had to bet....I would bet on a market "correction".....far short of a complete collapse, and perhaps not even all that deep (considering the huge amount of monetary 'hot air' holding it up.     After the correction, I expect several months of dire talk which will soon give way to MSM preaching that the market "needed a correction".....which will eventually lead to another round of money printing because the market drop "fixed" the over pricing.   

This charade can go on for quite a while longer.     As always the caveat is some huge disruptive event ... natural or man made. 

Thu, 05/28/2015 - 10:51 | 6139912 Eyeroller
Eyeroller's picture

Old Yeller aka The Ponzi Munchkin, wants to introduce QE4, but it can't happen with markets at all time highs.  There has to be a crisis of a 10% drop first. I expect another October type pullback.

However, what the Feral Reserve is terrified of is animal spirits being let loose.

Just like October, they will intervene right before it gets to 10%.

 

Thu, 05/28/2015 - 10:26 | 6139818 fremannx
fremannx's picture

Nobody seems to be talking about the largest Dow Theory non-confirmation in history. Since Charles Dow first noticed the correlation in the early 1900s, divergence between the Industrials and the Transports has always led to a collapse in the stock market. "This time it's different?" I don't think so...

 

http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...

Thu, 05/28/2015 - 10:56 | 6139933 Eyeroller
Eyeroller's picture

I visit that site often. However, one wonders how relevant E.W. theory is nowadays with all the Feral Reserve manipulation.

http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...

 

Thu, 05/28/2015 - 12:39 | 6140339 Inbetween is pain
Inbetween is pain's picture

Exactly. ZH has been predicting the imminent collapse of the stock market for years. Well, one of these days I'm sure they will be right. And Tyler will boast about how they predicted it just weeks before or months before, ignoring the fact that they predicted it wrongly for years.

Thu, 05/28/2015 - 10:40 | 6139869 Yancey Ward
Yancey Ward's picture

I predict that by late Summer, the Fed will all but announce ZIRP until well after the next election.  This will start a rally that takes the S&P over 3000, the DOW over 25,000, and the Nasdaq over 8000 by Spring of 2016.  We might even get QEIV sometime after Jasshole meeting.

Do NOT follow this link or you will be banned from the site!