US Stocks—New Highs and New Lows

Yes, it looks like the equity melt up has in fact resumed. The S&P500 gained another 1.7% last week and set new record highs before retreating a very little bit on Friday. Volume was extremely low, which as mentioned last week, suggests that last week’s move higher was not done with a rush of new buyers. Volatility dipped some more, but as in the prior week, it didn’t fall back down the lows reached in earlier this year.

Very few economic reports were released last week. The consumer price index shows no signs of inflation. Both headline and core rates show very mild price increases. Housing starts were a bit stronger than expected. Initial jobless claims came in near the 300,000 mark. The Philly Fed survey was somewhat stronger than expected, as were existing home sales. But again, very little can be inferred about the US economy from these reports simply because so few were announced. Next week, the number of releases will jump back up to more normal levels.

The technical picture has returned to one where the US equity markets look extremely overbought. Prices on both the daily and weekly perspectives have jumped back up to their respective upper Bollinger bands. While this is the area they’ve been hugging for the past one and a half years, long-term historical data suggests that prices will not remain there forever, that once they reach this area and stay there for a while, they tend to correct back down to the lower Bollinger band. Shockingly, this hasn’t happened since 2012. So stocks have been overbought, arguably, on a sustained basis, since that time. Coincidentally, this is approximately the amount of time that the Fed has conducted its latest QE program, the program that will almost certainly be shut down—as stated directly by Fed officials—in less than 60 days.

Finally, there is one very important breadth indicator that has diverged very bearishly from the latest new high set in the S&P500 last week. The number of new highs minus the number of new lows (for the NYSE) has surged above 500 every time new record prices were set in 2012, all of 2013 and even the first half of 2014.

But this time, this latest surge in July and late August is different. This time, the new highs minus new lows has risen to only about 300—far below the 500+ seen at every other price high.

This means that the market internals have badly broken down….that fewer and fewer market leaders are—this time—participating in price rise. And more importantly, every major market correction is preceded by a break down in this internal measure.

Will this time be different?

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