Daily update 10/13 Profit margin problems

Double top?

SPX briefly stuck its head above the 9/17 high.  However, there was nothing but sellers up there.  For today resistance clearly won.  The last few days look a lot like a short term top don't they?  Coming at resistance and in a primary down trend odds are probably pretty good the bounce just ended.  Breadth was -72% after being +54% at the intraday high.  That is a significant reversal.  Volume was light which indicates it did not take much selling to push prices down.  Not a good thing for bulls.

The futures have confirmed red bars which means we are in a micro down trend.  This is the first true test of this rally.  How will bulls react? 

The green/red bar chart saw a big dip in the green count while the red count barely budged up.  That indicates to me people were just taking profits on their winners.  The green count has not been this high since July 2013.  Investors really rushed in.  Now we will find out if that was a smart move or not.  Getting over 90 in either green or red is more often a reversal point rather then sparking a long move.  It is truly a very overbought or oversold market.  If price can hold up while the green count drops to 50 or so then we would likely have a sign of strength.

JPM missed earnings after the close.  The financials have a big impact on sentiment.  If the market can see the problems were strictly JPM then no problem.  If investors believe there are wide spread problems in the financial sector then say good bye.

I have seen a number of articles and heard quite a few pundits out proclaiming the bull market is back on.  Outside of the previously mentioned Zweig breadth thrust I do not have any other confirming indication that is the case.  We now know that the breadth thrust is not really the most reliable indicator either.  The market likes to fool as many people as it can.  This looks just like a bear market rally to me.  Fast and furious to make the bulls believe and flush out the weak shorts.  Mission accomplished.

The rest of the week will likely be driven by the earnings news.  There could be some variation day to day depending on how the reports come in.

This is an interesting article on profit margins.  Warren Buffett and Jeremy Grantham have been warning us about this moment for years  This chart shows another indication that a recession might be looming.

"The link between profit margins and recessions is strong," Barclays' Jonathan Glionna writes in a new note to clients. "We analyze the link between profit margins and recessions for the last seven business cycles, dating back to 1973. The results are not encouraging for the economy or the market. In every period except one, a 0.6% decline in margins in 12 months coincided with a recession."

Yet another warning sign on top of the economic data.

Bob