In the daily chart of NYMO below we can see how this divergence has developed:
|NYMO Daily - Click here for a live and updating version|
Before we begin, please note that of all the market internals indicators, some are relatively quick and 'reactive' to daily market conditions and some lag the markets by a few more days. NYMO is one of those quicker ones... it's one of the first to issue warnings. On the other hand, the Summation Index (a derivative of NYMO) is one of the laggards, typically reacting 3 or 4 days after a major turning point. Not always, but usually. Ok, so now that we're clear that today's discussion is about one of the indicators that is fairly sensitive, we begin...
Of prime interest here is the fact that at the end of June, NYMO registered the highest monthly reading of all time. Interestingly, the last time it was up in the nosebleed section like this was in May of 2004, a full year after the market low of March 2003. It just stands to reason that after stocks have gone through a crash such as that which occurred between Aug. 2000 and 2003, perhaps as many as 90% of all stocks had been declining. So it's natural that once a recovery takes hold, a whole lot of those 90% of stocks that had been declining suddenly begin to rise in unison. And of course that quickly shoots the McClellan Oscillator through the roof. The exact same effect occurs with the much esteemed Zwieg breadth thrust indicator, but from past experience I can assure you, 95% of investors I've run into simply cannot understand how a breadth thrust can happen on a mere recovery off a severe low (which can turn out 'not' to be 'the' low). They laugh at me. I smile politely as I quietly relieve them of their wallet. But I digress.
So we now have to ask the questions: "Are we seeing the markets just at the verge of cracking up and heading toward 1100? Or are we seeing the markets on the verge of a new bull run such as that magnificent rally that began in March 2003 and lasted four and a half years?" To tell you the truth, as far as the McClellan Oscillator is concerned, it really could be either.
So we zoom out a bit and take a look at the weekly chart of NYMO below:
|NYMO Weekly - Click here for a live and updating version, complete with a few more indicators|
At the end of June, the McClellan Oscillator closed the month at the highest reading of all time (on a monthly basis). On a weekly basis, and even as of this evening, NYMO is currently sitting at the second highest reading of all time. Looking at both charts above, in consideration of where the McClellan Oscillator currently resides, the only thing we know with 100% certainty is that the market is going to be headed south at any moment. Perhaps it will begin with the market open on Thursday. Perhaps the rally can even last as long as to finish out the week a bit higher. But it's going to pull back. If you're long... get out because the potential for downside risk dwarfs any reward you could possibly gain over the coming weeks. You got your 8% in six days... now take it off the table. This is a conclusion that's not even open for debate. C'mon investors, the markets have just put in a magnificent 8% rally in 6 days, closing on the one week window that has marked a major turning point in 1998, 1999, 2003, 2006, 2007, 2009, 2010 and 2011. True enough, not all of them were tops. But if a turn is going to happen during this same week of this year, I can tell you this year it ain't going to be a low. The question that is still open for debate is how far that pullback is going to go. That part I don't pretend to know. All I'm very comfortable with is that the market internals are sending a signal that basically says "enough already" and that we'd best be prepared for the inevitable... and that being "no bulls, you're not going to get another 8% over the next 6 days."
|Every once in a while we hit the end of the road|
Wishing all of you nothing but success going forward... and a beautiful and happy summer.
Until next time....
UPDATE: July 4th, 2012
Papa_Boule has made reference to a couple of great 'broad measures', the GDOW and VEU (the ETF that includes everything BUT the US indexes). In the interest of providing a 'visual' for our discussion, I've added a daily version of GDOW below:
|GDOW Daily - Click here for a live and updating version|