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Wednesday, February 13, 2013

Bad breadth again

This Feb. has seen a drop in the McClellan oscillator while the indexes continue up.  Lets look at the chart.

The oscillator is spending most of its time right around the zero line.  Usually this condition is short lived.  It normally means the market is exhausted and it starts a pullback.  Lets look at the chart from last Feb.

I circled the area of interest.  The oscillator went negative in Feb. and stayed there almost continuously for many weeks while the indexes kept climbing.  When this happened last year I took a look at past history and I could not find anything like that.  I looked back all the way to the 1970s and the closest thing I could find was in Aug. of 2000.  Here is the chart.

The 2000 instance did not last very long and ended up being the final high before a nasty bear market started. This is an extremely rare thing for the market to do.  Last year when the market finally topped, there was a rally to a slightly lower high before the bigger decline started.  In 2000 that was not the case.  The market just fell away pretty fast and the first real bounce was to a considerably lower high.  How long this rally will last I cannot say.  I think there is likely to be a 5-10% correction awaiting once it ends.   The question becomes how does it end.  Does it end like last year with a nice warning to hedge or raise cash or will it be like 2000.  Breadth is an early warning system on when the market is likely to pullback.  What the breadth is saying is that this market should make a short term top right around here and start a pullback.  If this market continues up next week I would say we are in the same condition as last year where things are not working normally.  It seems hard to believe it could do the same thing again even though it never happened before, but I guess stranger things have happened.

In Current sentiment picture back in Jan. I noted quite a few differences between the market this year and last.  Will the market keep moving up over the next several weeks like last year or not?  Last year the market was climbing a wall of worry and every day the media was talking about what could go wrong.  This year the market is leaping for joy and climbing on tremendous optimism.  Will the market be disappointed or rewarded for that optimism?  Last week the USA Today had an article titled "Investors shrug at anemic profits" and subtitled "4Q results are ho-hum, but stocks are ho-hot".  Therein lies the problem.  The market has a way of ignoring things for periods of time and then all of a sudden it takes notice.  I have this nagging feeling that the exit is going to be crowded at some point, but I have no idea when that point will be.


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