Friday's action did very little to change my view of the market. It's overbought, and I expect either short-term chop or a short-term pullback. At this point, I don't yet see the ingredients for a much bigger decline.
But there's that indicator that depicts the percentage of S&P 500 stocks trading over their 50-day moving average line. I don't tend to use that indicator, but I repeatedly get asked if I would discuss it. It's an indicator that seems to be bothering many. So, let me try and break it down for you.
The first thing you see is that it has a series of lower-highs, dating back to the peak in February. At first glance, that doesn't look great. Then I look back at what the indicator did in the months prior to the October high (red box), and, quite frankly, it was cruising along sideways, seemingly without a warning sign to be seen.
Oh sure, by the October high it was in free fall, but did it have a series of lower-highs as it does now? Not that I can see. And the free fall was only a week before the S&P made its high.
I did go back to the 2007 high in the market and found something curious. Look at that series of lower-highs in that spring and into summer (blue box). Now that looks similar to today, or at least closer in pattern. The red arrow on the chart represents the October 2007 high. Again, I see nothing that would have shaped up as a warning sign from this indicator as we headed into October 2007.
The blue box on the chart of the S&P represents that spring into summer where there were lower-highs in the indicator. We had the big August decline and the rally to a higher-high. Now, consider the Sentiment Cycle chart I have shown several times: The August high was "returning confidence," the August low was "buy the dip" and the October high was "enthusiasm." One reason we know October had enthusiasm: The Investors Intelligence bulls were over 60% at that October high.
The Transports have the same situation as the small caps. Both the 50- and 200-day moving average lines are rolling over, and unless the Transports can rally hard over 10500 in the next week or so, this is a problem.
Recently I wrote about the 200-day moving average line for the S&P. It is currently flat, but for these two major indexes that is not the case. So if you want to fret over something, then fret over this. Don't fret over the number of stocks over the 50-day moving average since I'm not so sure that gives us any signals.