Be Terrified: Stock Market Breadth Is Weakening

 | Dec 06, 2017 | 11:19 AM EST
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Most of the indexes closed lower yesterday -- except for the Nasdaq 100 Index (below). Internals were negative on the NYSE and Nasdaq as volumes declined from the prior session -- but no support levels or trend lines were violated on the charts, despite some warning signs appearing and breadth weakening over the past few sessions. The data is mostly neutral -- with a couple of caution signals.

On the charts, the Nasdaq Composite Index (below) closed on support and its short-term uptrend line. Any further weakness there would cast a longer shadow for that index. Potential warning signals were registered on the S&P 500, S&P Midcap 400 Index and Value Line Arithmetic Index (see below), as all flashed "bearish stochastic crossover" signals. Those signals were also seen on the NDX and COMPQX last week -- and just prior to their recent pullbacks.

What may be of greater import is the recent weakening in overall market breadth, as the All Exchange cumulative advance/decline line has turned neutral from positive and the Nasdaq A/D has now turned negative and below its 50-day moving average. This shows a recent deterioration in overall market strength. Only the NYSE cumulative A/D remains positive. So the near-term chart trends are neutral for the NDX and Russell 2000 Index (below), as the rest remain positive.

The data is mostly neutral with a few yellow flags. All of the McClellan OB/OS Oscillators are neutral (All Exchange:-15.69/+12.23; NYSE:-6.6/+24.73; Nasdaq:-26.59/+1.82). The Total and Equity Put/Call Ratios are also neutral at 0.83 and 0.57, respectively, as is the Open Insider Buy/Sell Ratio, at 28.5. However, warnings are coming from the OEX Put/Call Ratio -- at a very bearish 3.56, as the pros have loaded up on puts along with a bearish 18.21 ISEE Sentiment Index.

In conclusion, weakening breadth suggests a bit more caution may be warranted for the very near term, while valuation remains near historic highs. Yet the current index trends should be respected until proven otherwise.

Forward 12-month earnings estimates for the SPX from Bloomberg of $140.60 leave a 5.46% forward earnings yield on an 18.7x forward multiple.

 

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