Diverging Breadth and Frothy Sentiment
Today’s selloff did not catch the Advance/Decline Line off guard. As you can see in the chart above, as the S&P 500 and NASDAQ logged minor new highs yesterday and DJIA did last Friday, market breadth has been diverging. NYSE Composite and S&P 500 breadth have flat-lined over the past week while Russell 2000 and NASDAQ breadth turned clearly lower. This indicates a market running out of gas as advancing issues are unable to outpace decliners and in the case of the NAS and R2K decliners have been beating out advancers over the past week.
This bad breadth scenario comes at the outset of the seasonally weakest time of the year from mid-July through October – AKA the “Worst Four Months.” In addition, bullish sentiment had reached dangerous levels in the face of a dearth of bears. The chart below courtesy of the venerable Investors Intelligence U.S. Advisors Sentiment Report shows the difference of the Bullish Advisors % less the Bearish Advisors %. When this gets above 40 it’s a warning sign and with 60.8% Bulls and 15.5% bears the difference is now 45.3%.
The weekly CBOE Equity-Only Put/Call ratio tracked in Barron’s “Market Lab that we have followed for years, has also reached extremely complacent levels lately. Put/Call retreated from the modest fear level of 0.59 at the May lows back down to 0.41 the first two weeks of June and logging 0.43 and 0.44 the past two weeks. We have been getting defensive and in a neutral posture since our April 22 Best Six Months Seasonal MACD Sell Signal for S&P 500 and DJIA and have been preparing for our MACD Sell Signal for NASDAQ’s Best 8 Months which appears imminent.
