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Market Analysis: Trend Health May Indicate September Inflection Point

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

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Over the last couple of weeks I have been rethinking my bullish working thesis and in particular, the importance of September 2012. The convergence of extreme readings for several metrics as well as bearish technical divergences suggests that it could have time-stamped a long-term inflection point for the equity market.

Notable Data Points
1. The Nasdaq Composite Index (INDEXNASDAQ:.IXIC) and Nasdaq 100 Index (INDEXNASDAQ:NDX) advance to the 50% retracement level of the 2000-2002 bear market. Both indexes are unable to close September above the key retracement level.

2. The Russell 2000 Index (INDEXRUSSELL:RUT) advances near the 2011 highs at 868.57 on September 14, but is unable to print a new all-time high. This is the third time that the index has struggled to break above the 2007 highs at 856.48. The other two times were May 2011 and March 2012.

3. The S&P Mid-Cap 400 Index (INDEXNYSEGIS:MID) advances to an all-time high on September 14, but could not follow-through.

4. The number of NYSE (INDEXNYSEGIS:NYA) stocks printing 52-week highs hits 958 on September 14.

5. The ISEE Index prints a 52-week high at 205 on September 14. Retail investors are super bullish on the equity market.

6. On September 7, 2012 Tom DeMark forecasts that the S&P 500 Index (INDEXSP:.INX) will top at 1478. The index 1474.51 on September 14, 2012. Tom DeMark has been successful calling this bull market so I consider it an important data point.

I have posted four charts below that offer compelling evidence that the September 2012 price highs were the final hurrah for a bull market that had been slowly deteriorating over the last year.

No Conviction

The first bearish divergence that stands out for me is between the NYSE Cumulative Advance – Decline Volume indicator and the equity market during 2012. The early 2012 highs and the September 2012 highs were not confirmed by the indicator. If the uptrend is healthy there would be new highs for volume accumulation.



Not An Encouraging Historical Precedent

To take an alternative look at market volume I took the 4-day moving average of the S&P 500 Index volume in order to compare it with holiday-shortened weeks and the result was interesting. Excluding the Christmas holiday periods, the moving average reading near the September 14 highs for the S&P 500 was the lowest since the bull market highs of October 2007. Not an encouraging historical precedent.





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.
No positions in stocks mentioned.
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