The Corrosion Continues

 | Apr 18, 2013 | 7:15 AM EDT
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Here we go again. After Wednesday's market slide, we're seeing differences between shorter-term and immediate-term prospects -- so we'll begin with the former.

The CBOE Volatility Index (VIX) got a little jumpy Wednesday, and the put-call ratio zoomed to 119%, the highest reading since Nov. 7. The Arms Index (TRIN) got near 3, the highest figure since late February, and 90% of volume was on the downside. All of that has a tendency to lead to some sort of rally within the three trading days that follow.

What we did not see was a contraction in the number of NYSE stocks making new lows. In fact, this indicator is now at triple digits, and we're seeing the highest new-lows reading since November, when the S&P 500 was trading about 10% lower than it is now.

Number of Stocks at New Lows -- NYSE

I've explained the importance of this statistic in earlier columns, most recently using the example of Goldman Sachs (GS), which had been hitting lower highs even as the S&P had continued ever upward. Lower highs (and lower lows) are what create tops in stocks. The indices are simply mathematical calculations; it's the individual stocks that comprise them that were diverging. When the sum of the parts is less than the whole, eventually the whole comes down.

So when we see an expansion in the number of stocks making new lows as the S&P continues to hug its uptrend line, we can see not only how many stocks are failing to participate in the rally, but how many are trading lower than did last November.

Speaking of "hugging the uptrend line," many have cited this as a reason to be bullish. It is true that, so long as the S&P holds on to a rising uptrend line, it has not done anything wrong. Below you can see that the uptrend line. It is not hard to see the 1540 area as the strong support level.

S&P 500

As I was going through some old charts Wednesday, I found this old one that saw the uptrend line hold consistently over a long period. This is not meant to scare you; rather, it is meant to make you stop and consider what it can mean when a longstanding uptrend line is broken.

What chart is this? It's the Dow until the Thursday before the Crash of 1987. I did not even recall that such an uptrend line had been in place at the time, but clearly it was. This is not meant to say that once this uptrend line is broken -- and, yes, I do think it will eventually break -- the market will crash. Crashes are anomalies, so I would never look for one. But the underlying statistics have been deteriorating, and that uptrend line has held its ground for a long time, so we should not ignore the prospects of what will happen when it finally breaks.

Otherwise, the McClellan Summation Index continues on its downward path. The Hi-Lo Indicator is making lower lows as well. We've discussed the Russell 2000, especially relative to the S&P, several times of late. It is toppy and not "oversold" on an intermediate-term basis. The KBW Bank Index has broken its uptrend line as well. The Nasdaq dipped below its 50-day moving-average line Wednesday, and the Dow Jones Transportation Average is also below its 50-day line. So, even though I can foresee a short-term rally, I still think the upside is limited due to all the corrosion underneath.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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this chart is showing great bullish signs here, we like this to take out the old high shortly. ...



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