The S&P 500 has now lost a whooping…pun intended… 4.2% of it’s value and bearishness is rampant (e.g. AAII investor sentiment was at a bottom low of 22% last week). Many market pundits will have you believe Armageddon is already upon us, but at 4.2% that seems a bit too early a call, isn’t it!? Well, let’s see what market breadth tells us. One great way to track it is to look at the Summation Index (SI of the McClellan Oscillator, called NYSI). Frequent readers know I.I. tracks it diligently and as promised yesterday, let’s take a look at what we got. Below is the NYSI since the 2009 price low. We can see that it was at record low levels (-1600) in late 2008, then at -1000 at the actual March 2009 low. Now that’s what I.I. calls “buy-baby-buy” levels! This positive divergence then set in place the current bull market (e.g. in March 2009 much less stocks were participating in the decline then in late 2008: under the hood the market was already significantly improving!) Continued below chart.
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Since the 2009 low we can then see 4 readings centered around -500 to -600: in the year 2010, 2011, 2012, 2014. All 4 coincided with significant market bottoms: all 10% or more corrections. But, also after each correction double digit % gains were to be had. Note that the NYSI did not even drop much lower during the 22+% correction in 2011. Now, compare that to the current NYSI of -395 and only a 4.2% decline in price, and it appears the bears are getting ahead of themselves and the market is setting up for a rally. Also note that the RSI5 on the NYSI has been oversold for months. Albeit there are no signs of a turn north, or of positive divergence like in 2009, 2010 and 2011 (but there was none in 2012 and 2014 and as such thus not necessary to signal a turn) if history is of any lesson during this 6+ year bull, then it is that NYSI is rapidly reaching levels that coincide with important bottoms and that there’s not much room left for the bears; i.e NYSI is now at it’s 4th lowest since 2009.
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