This an an excerpt from last week’s Premium Member Major Markets Weekly Digest. Please click here to signup and get instant access to one of the most accurate and reliable stock market forecasts in the industry send daily to your email inbox.
“Usually, the first warning sign that a Bull market is aging is when the percentage of stocks rising to new 52-week highs begins to contract: the NYAD begins to decline as there are less advancing stocks and more declining stocks. This warning can occur six to twelve months in advance of the final highs in the big-cap indexes. It is not so much a sign of weakness as it is a sign of fading strength: fewer and fewer stocks are participating in the Bull market. This is evidenced in the various equity indexes which will start to show divergences.”
“Namely, at the beginning of a Bull market pretty much all indexes tend to rise, albeit at a different pace. But, during the latter stages of a Bull market some price indexes stop rising and begin to turn down as the remaining Bull market becomes increasingly selective (as mentioned above). Most often the big-cap indexes DJIA, S&P 500, NASDAQ and NASDAQ100 continue to show strength while downtrends in a variety of sector or smaller-cap indexes – such as the S&P400, 600; the NYSE Composite, the Russell 2000, or the Value Line Composite Index – start to set in as the Bull market ages. Most of these are less-popular and less-known indexes, which the general public and even many traders and investors have either never heard of or don’t pay (much) attention too. As these smaller-cap indexes fail to confirm the continued strength in the big-cap indexes, the warning signs become increasingly important. So over the next few pages let’s review the evidence.”
“The NYAD for common stocks only (I prefer to use this one vs the regular NYAD as it excludes interest sensitive issues albeit those are not that many, but in today’s interest-rate climate it can be important to disregard them) continues to trend higher and has not put in the negative divergence as we saw in 2007. It is very clear negative divergence is absolutely not necessary to usher in larger correction of ~20%… !! (Dotted green arrows in 2010, 2011, 2015/2016, 2018). I therefore find this breadth measure a highly unreliable indicator for assessing when markets top, aka pending corrections, etc. But, I already showed this way back here so I regress. At best it is a good forewarning of Bear Markets like 2008/2009. Hence this one is not yet forewarning of a Bear market.”
But, if we look at the different S&P indices we see a different picture being painted. The upper plot is the S&P1500, followed by the S&P500 (large-cap), the S&P400 (Mid-cap) and the S&P600 (Small-cap), with the Value Line Composite index (XVG) 4th and the NYA last (See Figure next page). The SPX1500 is the sum of the SPX400, 500 and 600, and is 90% of US market capitalization.
“We can see that the SPX1500 is mainly held up by the SPX500 as small- and mid-cap are lagging. These latter two have not made new ATHs since August/September 2018 and neither have the other two indices (XVG, NYA). In fact, most are treading water: currently at the same levels as in late-2017. So clearly, at this stage the smaller-cap and equal-weighted indexes have failed to confirm the continued strength in the big-cap indexes. As such the warning signs of an aging Bull are there as the NYAD has not yet confirmed the start of a Bear market. So, current market environment is not supportive of the start of a new Bull -as some continue to think and show- but is at this stage supportive of that of an aging Bull, which likely has a bit more to run. This fits with my preferred bigger picture Elliott wave count of a final Primary-V wave being underway or coming to our doorsteps soon after a quick flush down.”