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The Summation Of All Fears
This negative breadth signal has an ominous long-term track record.
Yes, this is another post about the market’s deteriorating breadth situation. We can’t pick the market we want, though. We must deal with the one we have. And the reality is that one of the overriding themes of the current climate, in our view, is the weakening foundation of the market’s internals. By internals, or breadth, of course, we are referring to the level of positive participation among all stocks. This can be measured in many different ways, such as the number of stocks that are advancing versus declining or the number of stocks making new 52-week highs versus those making new lows. As mentioned, the breadth readings of late have been weak, even historically so by some measures. And it isn’t just a day or two here and there. Even longer-term, cumulative measures of breadth are reaching levels that, historically, have led to subpar stock performance over the longer-term.
One such cumulative measure popular among technical analysts (TA) is the McClellan Summation Index, developed by the eponymous groundbreaking TA family. Without getting too technical, the McClellan Summation Index is essentially an oscillator that reflects a running, cumulative total of advancing issues minus declining issues. There is a bit more math involved, but basically it is a measure of market breadth on a longer-term basis. It can also be applied to the number of new highs minus new lows.
Typically, but not always, the Summation Index will move in the direction of the market. At times, though, it will diverge, i.e., move in the opposite direction, from stock prices. Such a divergence can be an indication that the trend, at least in terms of breadth, is weakening. Eventually, that can have an impact on prices as well. For example, after a long uptrend in stocks, it is not uncommon to see the Summation Index begin to fade as breadth struggles to keep up with the stock averages. On occasion, the Summation Index of advances-declines or new highs-new lows will turn negative even as prices remain near their 52-week high. Even more rare is the situation wherein both the McClellan Summation Index for advances-declines as well as new highs-new lows each turn negative while stock prices remain near their highs.
That rare combination took effect as of today’s close. Specifically, each of the Summation Indexes were below 0 while the S&P 500 was within 1.5% of its 52-week high. This was just the 59th such occurrence since 1970.
The 59 occurrences all took place in 4 distinct periods, though most of them happened within 2 clusters:
- August 1972 (13)
- November 1999-March 2000 (44)
- September 2007 (1)
- July 2015 (1)
(We also disqualified any occurrences that came immediately following a 6-month low, of which there was just 1: the end of October 2014. That came immediately following a near-10% correction in the S&P 500 that naturally took its toll on the breadth measures. The S&P 500 basically rebounded back to its former highs before breadth could recover. Thus, this reflects a slightly different situation than the other occurrences.)
Like several of the examples of poor breadth that we looked at recently, the stock market seemed to follow a similar pattern, in general, following these events, i.e., weakness in the short to intermediate-term followed by a bounce in the latter intermediate-term followed by consistently weak performance in the longer-term. As we are interpreting this development in terms of longer-term relevance, it is that longer-term performance that we are most interested in. And by a quick glance at the dates above, or the chart, it is pretty obvious that the longer-term did not work out too well for stocks following such occurrences. Here are the performance statistics following the 58 prior examples:
The S&P 500 was consistently weak out to 2 months. After that, more than half of the occurrences turned in gains after 3 and 6 months. Beyond that, it was a different story. Of the 58 prior occurrences, not one single time did the S&P 500 show a gain 1 year later – or even 2 years later. Given that many of the occurrences were clustered together, perhaps this is a slightly distorted way of presenting the data. Furthermore, perhaps it’s all just a coincidence. However, we are not big on coincidences. In our view, this represents a deterioration in market breadth similar to those which occurred in the lead-up to cyclical tops in 1973, 2000 and 2007.
While some may accuse us of curve-fitting, data-mining, etc., that really isn’t accurate. There is precious little optimizing going on here. We are simply taking the pulse of the current stock market climate and quantifying it for research purposes. Either way, the conclusion is the same to us. Specifically, when the McClellan Summation Index on NYSE advances-declines AND new highs-new lows registers a negative reading while the S&P 500 is within 1.5% of its 52-week high, the index has struggled mightily, and unanimously, in the longer-term. Generally, the longer-term deterioration in market breadth is an unambiguously negative factor for the stock market.
So whether you prefer to define the conditions that characterize the present market for purposes of quantitative historical research, or you’d rather subjectively ponder the general state of the market, the longer-term outlook for stocks appears to be quite ominous.
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"You and your Little Dog Too!"....
.... except the markets are rigged - charts mean nothing...
A brightly lit EXIT sign on the wall doesn’t mean there’s a door underneath it.
Looney
... read somewhere the "McClellan Summation Index" was explained in layman's terms this way ...
... In the spring of 1961, Bobby, a technical analyst, goes to pick pick up his date. When he gets to the door, the girl's father, Mr. MClellan, invites him in. "Carrie's not ready yet, so why don't you have a seat?" Mr. McClellan says, and then asks Bobby what they plan to do.
"Probably go to the soda shop or a movie, sir."
Mr. McClellan responds, "Why don't you two go out and screw? I hear all the kids are doing it. Carrie really likes to screw ... she'd screw all night if we let her."
Well, this makes Bobby's eyes light up, and his plans for the evening begin to look pretty good. Carrie comes downstairs in her poodle skirt and announces she's ready to go. Breathless with anticipation, Bobby escorts Carrie out the front door.
20 minutes later, Carrie rushes back into the house, slams the door behind her and screams at her dad, "Dammit, daddy! It's called the Twist" ...
LOL--good one!
A burglar broke into a house one night. He shined his flashlight around, looking for valuables when a voice in the dark said, "Jesus is watching you." He nearly jumped out of his skin, clicked his light off, and froze. When he heard nothing more, after a bit, he shook his head and continued. Just as he pulled the stereo out so he could disconnect the wires, clear as a bell he heard, "Jesus is watching you." Freaked out, he shined his light around frantically looking for the source of the voice. Finally, in the corner of the room his light came to rest on a parrot. "Did you say that?" he hissed at the bird. "Yep," the parrot confessed, then squaked, "I'm just trying to warn you that he is watching you." The burglar relaxed. "Warn me, huh? Who in world are you?" "Moses," replied the bird. "Moses?" laughed the burglar. "What kind of people would name a bird 'Moses'? The bird ruffled his feathers briefly and said, "The kind of people that would name a Rottweiler 'Jesus.'"
I'm not worried because soon Amazon will be selling two bedroom cardboard box homes with optional iDuct tape to hold it together and Google will be advertising it prominently.....
Long term track record means nothing. Last 7 years of colossal stupidity is what matters.
A nice little crash would be a breadth of fresh air
Yeah, especially the massive comet crash type..
Is it just me or did this happen dozens of other times too? With no crash
I'm not afraid of anything. Bring it on.
what is all this shemitah stuff?
A blood moon jubilee baby
A 4th Turning
A righteous duderino
It would be a Blue Moon that occurs on Friday the 31st. Stop thinking about blood all the time, people get funny ideas.
It the rapture...but for the jewish people. Instead of being yanked into heaven they are cleansed of the ickyness of debt....very refreshing I hear.
Martin Armstrong says gold bugs are suckers who have been swindled by the gold promoters
Central Banks too? They don't seem to want to part with theirs anymore. And the vast sea of goldbugs in China and India? Suckered by history I guess.
+1 though there are two kinds of them: those who keep the barbaric relic and those who ask theirs back
China has admitted (Yi Gang CB director) that they simply cannot get the gold they want because 'the market is too small'. This is an admission that if China spent even a small part of it's trillions on gold the POG would sky rocket.
China seems willing to play the long game for now and accumulate slowly. The reason, however is not that they don't value gold, but that they don't want to pay the kind of prices we'll see after gold finds it's correct price.
You can argue about the correct price of gold (there is no such thing) but it surely is a lot higher than the one we see now. Now a request for gold is met with the promise of future delivery. When faith is lost in future delivery the price will jump....probably a lot.
They could 'back-door' it - say, through Belgium.
So then how does one store their wealth if not PMs?
Gold is the best way to store wealth. It is for savings that won't be needed for a longer time period. This is probably the very best time in human history to buy it. Who knows, today might be the very best day. The price is falling but you can still get it. If it falls farther it will become unavailable.
...if only my safe wasn't full I'd buy more.
Easy fix. When my gun safe became full, I bought another safe.
Martin Armstrong also concedes that gold is the best hedge against insane government. Which is what we have now. So own some.
Shorting the vix will only work so long for Kevin Henry.
Somehow I get the feeling we are about to witness another "first time this has ever happened" event. The "market" is a rigged policy tool after all.
what happens on the 60th time? and were the previous episodes underpinned by an equal amount of manipuflation?
Soooo-- the take away is? This can all be straightened out by moving companies from one index to another, seasonally adjusting for solar flares and moon phases,
and making the number one into five. There, now everybody needs to BTATFH. Don't say I didn't tip you off. I told my shoe shine boy this morning, pass it along.
In other words:
Help us Obi Wan Yellen! You're our only hope!
Since the "tools" were not in place previously (so the Bernank said), there is no guidance to where these fully manipulated "markets" will now go. Fiat will fail, but when... that is the difficult thing to know...
That's pretty damn bullish. Good for at least one QE.
Does "negative breadth" have greater predictive power than "Hindenburg Omens"?
Dammit, I wanted to be the first to mock Zero for the Hindenburg Omens and now this. What's next... The Bobo Red Nose Formation of Doom?