The market action has three main characteristics right now:
- The indices are making little progress. The S&P500 had minor losses for the week for the fist time in a while. The dips are still being bought but there has been much upside progress for a couple weeks. Small caps (Russell 2000 ETF (IWM) ) have acted even worse and haven't see new highs since early October.
- The action is narrow. The main reason small caps are lagging is because the average stock is acting much worse than the big caps that drive the indices. Even though the indices are up today there are only about 2850 gainers to 3600 decliners. There are also more stocks at 12-month lows than highs. 45% of stocks are below their 200-day simple moving average.
- There are some pockets of very strong momentum. Roku (ROKU) for example is trading up over 30% today and 58.com (WUBA) is up 7.2%.
As I mentioned in my morning column, the action has triggered something known as a Hindenburg Omen. In theory a cluster of these Omens is deemed to be a negative. On Friday the market saw the 6th recent Omen.
The details of calculation are complex, but an Omen Day occurs when there is a high level of both new highs and new lows on the NYSE. In addition there must be a rising 10-week moving average and the McClellan Oscillator must also be negative. The McClellan Oscillator is a measure of market breadth that is based on the difference between the number of advancing and declining indices.
To put it simply the Omen says there is a danger when there is a cluster of days where the NYSE is trending up but breadth is negative and there are a high level of new highs and lows at the same time. That pretty much sums up this market but speculators are finding things to do and that is the saving grace. Until the pockets of momentum narrow even more and the few big caps stop propping up the indices all we can do is watch and watch for a shift in price action.
There is some good reason for concern, but the Hindenburg Omen sounds much more frightening than the market looks.