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Tuesday, May 30, 2017

Daily update 5/30 The Bubble That Could Break The World

Uh oh.

Not a good day for bulls.  Breadth was -61%.  The popular big cap stocks were the only thing holding the market up today.  New highs slipped to 122.  New lows increased to 65.  That should not happen if the market was truly breaking out to go higher.  I think my initial assessment that this break out would fail will prove to be correct.

The futures closed back inside the channel indicating the thrust should be over and some consolidation or pullback is to be expected.  Since the break out did not go very far there is not much room for a pullback.

The green count took quite a hit today, but remains above 50.  Notice the last two upward thrusts were not strong enough to reach over bought levels.  The last solid thrust was back in mid Feb. 

Since the exhaustion gap on 3/1 upside progress has been extremely slow.  SPX has only managed to climb a few points above that intraday high.  Meanwhile there is no shortage of bullishness.  Even bears are throwing in the towel (at least in the short term).  I don't really get that with all the negative divergences here.  Why turn bullish now?  I think the May high and June pullback pattern is going to play out this year.  The bulls were willing to buy the dip today, but had no interest in chasing price higher.  The increase in new lows is a big warning sign.  No way that should be happening if the market was strong like the pundits keep telling me. 

There seems to be three opinions that are in the majority at the moment.  The first is the obvious everything is bullish and the market is breaking out to go higher.  The second is that longer term everything is bullish, but there might be some corrective type activity over the summer.  The last major category is longer term bears that think the market goes higher for now.  The number of people that think we could see a sizable move down from current levels seem to be almost non existent.  I can't think of seeing, hearing, or reading anything in that category recently.  I am sure there are some out there and I have just not seen them.  There definitely is no wall of worry to climb any more.  Whether that means the market is done climbing is impossible to say.  However, it remains a possibility.  The more normal thing to do would be to pullback over the next few weeks and rally into July and August.  That extreme complacency really bothers me though.  There is probably a non zero chance this ends up being the final high.  We might see a deeper pullback then people expect and a rally to a lower high over the summer. 

One thing I have not mentioned that is not always obvious to people.  Things always look good at market tops just like they always look bad at market bottoms.  That is the real reason why most people miss the turning points.  The usual way it works is for the market to top when things are as good as they are going to get.  They bottom the inverse way when things are about as bad as they are going to get.  Tops and bottoms cannot really be spotted by looking at current fundamentals.  They are usually evident by internal divergences of some kind though.  We did not the usual divergences on 3/1 as I noted at the time.  However, we have lots of them now.  Stay vigilant.

Regardless of how things play out over the summer a close by SPX back below 2400 is likely to start a pullback.

This is an interesting perspective on the types of bubbles.  The Bubble That Could Break The World  I will give you a chance to read that article then I will add some thoughts of my own tomorrow night.


1 comment:

GordonB1957 said...

Bob, I'm glad you posted an article that deals with the PE ratio of the S&P 500. I don't believe it can hold that level much longer.
I haven't communicated with you in years, but I hope you and yours are all well.
Thanks for the updates!


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