Rumblings of a Top

 | Feb 08, 2013 | 7:30 AM EST
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It seems everyone is finally coming to the conclusion that Europe hasn't been fixed, so the contrarian in me wants to jump back to the other side and be bullish. But I cannot. When I see the chart of the German Dax, I think that uptrend line begs to be tested, if not broken.


Italy's FTSE MIB Index, meanwhile, has support around the 16,000-to-16,250 area -- but it appears to me that this is just a stopping point before it goes lower.


It wouldn't surprise me at all if these markets rallied short-term. However, they have acted quite poorly relative to the S&P 500 since the start of the year, and that says the buying dried right up in the first week of January. Emerging-market indices, too, have been underperformers. I realize the bullish argument is that the U.S. is the best house in a bad neighborhood – but, in the last few years, we haven't managed to remain strong as the rest of the world has weakened.

In addition to my constant complaints about Europe, there has been a divergence in the ratio between  iShares iBoxx $ High Yield Corporate Bond (HYG) to the S&P -- as this turned down on the first day of 2013, much in the way it did for the Dax vs. the S&P. The HYG-S&P ratio, however, has now taken out the October low.

HYG vs. S&P 500

S&P 500

I have circled points A and B on the charts, so you can see where the S&P was trading during both of those "low" points on the ratio chart. Notice the turns weren't on a dime. In each case, it took weeks to manifest itself in the stock market. But it did eventually matter.

Unless you believe that all of these prior relationships have changed drastically and are no longer relevant, these are signs that the market is late in the rally.

Other signs of this exist in the statistics I quote here almost daily. The number of stocks making new highs has failed miserably for a few weeks now. Well, really, it's been longer than that. But even last Friday's session -- when the market rallied on the employment data -- only netted 416 new highs vs. a previous peak of 495. This week's higher high in the S&P saw 258 new highs. Now, if we look at the net differential of new highs minus new lows on a 10-day moving average, we'll see it has rolled right over.

The McClellan Summation Index hasn't officially rolled over yet; it has stalled out. But, in the last week, it has not managed to get itself facing upwards again on rally days. That is a sign of faltering.

The 30-day moving average of the advance-decline line has enjoyed a small push upward in the last week. It will shift right back to overbought early next week. Please notice how it has made very little progress since the start of the year.

30-Day Moving Average of the Advance-Decline Line

 I do not know what the market will do over the next few days, especially since the selling dries up every time stocks slide. But we've previously seen this occur for weeks on end -- and then one day the selling starts and seemingly never stops. When I look at all these indicators I can tell you I do not see this as the start of a new leg higher. I see it as an area of a top.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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