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Market Analysis: Trend Health May Indicate September Inflection Point


The convergence of extreme readings for several metrics plus bearish technical divergences suggests a time-stamped, long-term inflection point for the equity market.


Shorter Legs

The quarterly chart of the S&P 500 Index highlights the deteriorating market health. Since the beginning of the 2009 bull market each leg up has lasted one quarter less. It must be noted that the current quarter is not over so this could change. Nevertheless, the point is clear; the bull market has lost upward momentum.

Overall Trend Health

A few years ago I came across a chart from Terry Laundry that evaluated the market health by overlaying the S&P 500 Market Weighted Index on the Value Line Geometric Index. The Value Line Geometric Index is a broader index and a better representation of the US stock market in general. You can clearly note that following the 2011 "flash bear market," the broader market decoupled and did not print new highs like the S&P 500 Equal Weighted Index, or Equal Weight S&P 500 Index, which is known by a couple different names including the Rydex S&P Equal Weight ETF (NYSEARCA:RSP). The S&P Equal Weight Index is shown below.

In the book Soros on Soros: Staying Ahead of the Curve, George Soros stresses the importance of being alert for inflection points:
I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it. Most of the time we are punished if we go against the trend. Only at an inflection point are we rewarded.

The lack of volume accumulation, the shorter duration for each up leg of the advance, and negative technical divergences are characteristics of an unhealthy uptrend. There is a high probability that the September high was a long-term inflection point for the 2009 bull market. However, I have learned since 2008 that the US equity market is resilient and is prone to throwing the odd curveball. We should be prepared for both alternatives.

This article was originally published on See It Market.
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