A few days ago we explained [8]just how the dramatic divergence between the broader market and the number of stocks which are actually up and leading this rally has become, when we showed a chart of the NYSE advance/decline line overlaid on the S&P500.
[9]
The simple explanation of the above is that there are fewer and fewer stocks propelling the market higher. In fact, as we showed yesterday, if one removes just 8 stocks [10], AMZN, NFLX, FB, GOOG, NKE, ORLY, SBUX and HD, the S&P500 would be the red for the year.
[11]
Today, BofA's new chief technician Stephen Suttmeier picks up on this dramatic divergence and gives out the following warning: "A month-long bearish divergence for the US 15 most active advance-decline line has the potential to limit S&P 500 upside." His details:
The weekly global A-D line of 73 country indices in US Dollars peaked on September 5, 2014 vs. a May 15 peak for the weekly closing price of the MSCI ACWI Index, which is also based in US Dollars. The rise in the US Dollar has had a bearish impact on global equity market breadth (many equity markets have done much better in local currencies) and this A-D line has not confirmed the global equity market rally. This is a major bearish breadth divergence and a classic sign of diminishing breadth for global equity market indices.
[12]
Suttmeier then warns what our readers are already aware of, however extended to the global market, namely that there now exists "a major bearish divergence for global A-D line in US Dollars"
The weekly global A-D line of 73 country indices in US Dollars peaked on September 5, 2014 vs. a May 15 peak for the weekly closing price of the MSCI ACWI Index, which is also based in US Dollars. The rise in the US Dollar has had a bearish impact on global equity market breadth (many equity markets have done much better in local currencies) and this A-D line has not confirmed the global equity market rally. This is a major bearish breadth divergence and a classic sign of diminishing breadth for global equity market indices.
[13]
Most importantly, it appears that historically changes in the A-D line have been a useful advance indicator of major market breakdowns. To wit:
Watch big support on the most active A-D line
Big breakdowns in the most active A-D line preceded or coincided with big breakdowns for the S&P 500 in 2000 and 2007. The key for the US equity market in late 2015 and into early 2016 is for the most active A-D line to hold its support at the August, July, and December 2014 lows. A failure to do so would put in a top for this advance-decline line and increase the risk for a deeper US equity market pullback.
[14]
Which means that the central banks, whose only mandate is to keep the global market from crashing, will have to buy - either directly like the SNB and BOJ or indirectly/spoof like the NY Fed via Citadel - much more than just the E-mini and a handful of stocks to give the impression that the market is healthy when in fact, it is not.
Whether they can pull this off will determine if the Fed's long telegraphed "rate hike" is executed, or if come December 16 Yellen chickens out one more time, and the next thing the market will have to look forward to is the inevitable arrival of negative interest rates.