US Equity Market “Internals” are Deteriorating

Last week, the S&P500 took a pause from its massive bounce, the bounce that started the day after the US presidential election in early November. The S$P lost less than 0.1% on light volume. Meanwhile, the S&P’s volatility index (the VIX) crept a little higher; that said, it still ended the week only a small amount higher than the super-complacent lows reached in the summer months.

The US macro reports were mixed last week. While retail sales missed badly (and so did retail sales excluding autos), the Philly Fed Business Outlook Survey and the Empire State Manufacturing Survey beat consensus estimates by wide margins. But the rest of the news was weak—industrial production missed. Business inventories missed. Housing starts missed. And producer prices were hotter than expected. The biggest news of the week came from the Federal Reserve which raised the fed funds rates again (the first time since last year), but since this move was widely expected, markets had already priced in the move and the reaction was very muted.

Technically, the S&P500 remains extremely overbought, especially since last week’s tiny pullback did little to change this condition. So the S&P remains super stretched on the daily and the weekly charts—hugging extreme high levels in most price range indicators.

On the other hand, what’s happening beneath the surface—beyond prices—-is not so rosy. While the S&P remains near all-time highs, several “internal” indicators are far less bullish. Leadership for example, as measured by New Highs minus New Lows, is essentially at zero.  Usually, when new highs are reached on the overall price index, the number of new highs far exceeds the number of new lows.

Also of concern is the breadth of the advance, as measured by Advancing issues minus Declining issues. And while this number is positive, it is far below the levels reached during prior index highs. Another breadth measure—the percent of stocks above their 150 day moving average—is also not doing so well: ie. nowhere near the levels reached during prior market highs.

What does this mean?

The market “internals” are diverging — bearishly — from the overall S&P500. And in the past, as in over the last 100 years, all major declines in the overall price index were preceded by deteriorating market internals.

This is clearly happening today. But while this divergence does not portend an immediate market sell off, it does set off alarms, alarms that should tell us that big sell offs are far more likely to occur now….as opposed to times when market internals are not diverging from the overall price index.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: