Market Breadth

Quote of the day:

“Markets can remain irrational a lot longer than you and I can remain solvent.”

By John Keynes

 Me down at beach enjoying sunshine (if I can spot any). Life is good. The only reason I want to make this post is I come across the quote above today. In other words, don’t fight the trend just because you believe it should be going in the other direction. Usually the market does not moves in a straight line, but we know in 2013 that the Fed’s balance sheet was going to expand in a straight line and U.S. stocks have been more highly correlated to the Fed’s balance sheet than ever. If it has to go up, then just let it go up.

S&P 500 Index (SPX)

The advance to 1710 on August 2 is beginning to look like a potential Head of a small Head & Shoulders Top pattern. If set off by a close back below 1680 the minimum downside measuring objective will be 1650s. Since trends require increasing open interest, when it declines as the futures make new highs it signals profit taking by the bulls as they close positions. Since the top at 1710, I see continuous decline in Open Interest. Although volume is lighter than normal in August, declining open interest is a good reason to start watching for a potential trend change.

When the VIX index is low and starts advancing, the SPX tends to top. There is chance VIX is turning. A close above 14 would be a good reason to consider implementing some hedges.

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Breadth of the market

This market is hard to trade recently. One observation is the weak market breadth. Recently a lot of technical blogs are talking about Hindenburg Omens. I discussed it before. Here is the wiki link in case you want to read.

There are a number of criteria that set off a Hindenburg Omen, I am not sure if I totally understand it. Here is my quick and dirty explanation. It occurs when the market index is trending higher, but there are more declining stocks than advancing stocks. It could also happen when there are an unusual high number of new 52-week lows in an up-trend market. Last week we saw Hindenburg Omen four times out of the five trading day week. In fact, the last time we’ve had so many HO so closely together was in November 2007 after the S&P 500 had put in a multi-year peak.

The most common index for breadth is NYSE McClellan Summation Index. It declined every day for the last two weeks creating a divergence as the NYSE Composite Index advanced. As a reliable leading indicator, the decline reflects more issues declining than advancing. 

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Until breadth improves, I am going to delay new long positions and start considering hedge ideas. I don’t know how high the S&P 500 can go, but I know that it can go farther than most people believe it can and the top indicator continues to trend higher. I am expecting to add my long when S&P 500 getting close to 1,600.