Rounded Tops

Rounded Tops

The pattern of rounded tops continues to hold. As this bull market in equities continues to age, fewer stocks participate in each rally. Eventually, the majority of stocks start trending lower and a bear market takes hold. In the chart below, I show the percentage of stocks in the S&P 100 Index that are trading above their long-term 200-day moving average. (This is the broad definition of an uptrend). In 2018, 92% of the largest 100 stocks by market cap were in uptrends. By the end of 2018, that number had plummeted to just 13%. In Q1 2019, we experienced an aggressive 20% rally in the stock market, recovering the majority of the losses sustained in Q4 2018.

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Subtle Internal Weakness

Subtle Internal Weakness

At the lowest point of the December 2018 decline in the stock market, just 13% of the 3,000+ stocks on the NYSE traded above their long-term 200-day moving average. The recovery in the intervening months has been relentless; straight up without pause. Today, a much healthier 72% of NYSE stocks now trade above their 200DMA, a significant improvement. However, with each rally over the last 12 months, fewer stocks have been participating in the market advance.

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The Correction Begins....

The Correction Begins....

Last week I noted how many were taken aback by the sharp -20% plunge in global equities in December. A glance at some of the technical charts would have been enough to warn investors of the broad deterioration that was taking place beneath the surface. The information was in plain sight for those to cared to take a closer look. For example, the $OEXA200R captures the the percentage of stocks trading above their long-term moving average. It corrected sharply in 2018 despite the US equity indices making new highs in September.

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Bearish Trend Still in Force

Bearish Trend Still in Force

Regular readers will know I rely heavily on technical analysis and reading the charts to assist me in forming my views on global markets. It has definitely helped me navigate the volatility of the equity markets in recent months and steer clear of the downdrafts. Many were taken aback by the sharp -20% plunge in global equities in December. However, a glance at some of the technical charts would have been enough to warn investors of the broad deterioration that was taking place beneath the surface. The information was in plain sight for those to cared to take a closer look.

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Trend Reversals

Trend Reversals

US equities have acted as a port in the storm in 2018 while the majority of other asset classes have delivered negative returns for investors. Unfortunately, it looks like the US stock market is now joining the herd and rolling over after putting up an incredibly strong relative performance in recent years. The S&P 100 Index made a slightly higher high in October 2018 but the underlying trend has weakened sharply.

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Rolling Over

Rolling Over

Today, 73% of the stocks in the S&P 100 Index trade above their long-term 200-day moving average. That is a healthy majority and a requirement for broad bullish participation in a rising equity market. As long as the bullish percentage is above 50%, the benefit of the doubt should be given to the bullish trend. The risk lies in the rounding top pattern currently forming in this chart.

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Breaking Down

Breaking Down

Participation in this bull market in stocks continues to narrow despite the major indices trading near all-time highs. Today, just 46% of the top 100 US companies by market capitalisation now trade above their 200-day moving average. When the majority of stocks start trending lower, a sell signal is triggered for the broader market. We are at a crucial juncture today. Unless stock markets can turn higher shortly, selling will likely accelerate. Watching closely now.

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QT Triggers Market Reversal

QT Triggers Market Reversal

With yesterday's decline in the stock market, just 52% of the top 100 companies in the US as measured by market capitalisation now trade above their long-term 200-day moving average. When the majority of stocks start trending lower, a broader market sell signal is triggered. This market reversal is coinciding with efforts by central banks to reverse years of money printing via Quantitative Tightening (QT). I do not think they will get very far with this experiment. In Q3 2018, the US Federal Reserve will attempt to withdraw $120 billion from the market while the ECB will add $100 billion for a combined net withdrawal of -$20 billion. This net withdrawal by the Fed and ECB will accelerate sharply in Q4 2018 and 2019, unless the market breaks. All eyes are watching. Something has to give.

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Bad Breadth

Bad Breadth

This chart measures the percentage of stocks in the S&P 100 Index trading above their 200 day moving average. In a bull market, you should expect to see the majority of stocks participate in the advance, but today, only half the market is in rally mode. This can change. The stock market could simply be pausing for breath before the next move higher, but the weakness is concerning. We are in year ten of this bull market. The previous few ended with a similar drop off in market breadth before price gave way and the broader indices followed lower. Time to remain defensive for now. 

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Just 53% of Stocks Now Trade Above their 200 Day Moving Average

Just 53% of Stocks Now Trade Above their 200 Day Moving Average

With the recent correction in the stock market, the number of stocks trading above their long-term 200 day moving average has fallen sharply from 92% to 53%. Almost half of the US market is in a bearish downtrend. The markets need a strong recovery in April or a much deeper correction will unfold.

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