For example, on September 24th my blog post highlighted caution signals for the overall market. A variety of supply/demand flow measures had turned decidedly negative. We've seen weakness in stocks overall since that time. Reports indicate record amounts of cash being taken out of the market, with 49% of surveyed investors expecting a market decline over the next six months. That is the highest percentage since 2013.
And, yet, with all the selling, all the negative news, and all the bearishness, we have merely roundtripped the early 2018 performance.
This chart shows the ES futures from May of 2017 to the present. Each data point represents 50,000 contracts traded. You can see that the entire bear period to date has, so far, been a relatively flat correction on a large time scale. That is not so unlike the 1994 market, which dipped in the first and last quarters of the year, forming a range. The upside break of that range lasted six years.
Thus far, the flow and breadth measures that I track are not telling me that the selling has dried up. I need that confirmation before more seriously entertaining the upside. The below chart from Index Indicators, depicting the daily SPX average versus the number of 52 week new highs minus new lows, is quite informative. Notice how we hit a maximum number of new lows during the February decline, with new lows drying up over the next several months even as price moved lower for a while. On the reverse side, note how new highs dried up as we made fresh index highs in September, per the blog post at that time. At present, we've been seeing price weakness, but not a meaningful drying up of the number of stocks posting fresh 52-week lows. My measure of cumulative upticks versus downticks continues to make new lows, reflecting net hitting of bids across the broad NYSE universe.
As long as I'm not seeing signs that the lower prices are bringing in fresh value buyers, my game plan remains to fade short-term overbought levels that roll over at lower price highs. I'm open to both sides of the market, however, and am monitoring day over day strength versus weakness to handicap the odds of a big picture break from the longer-term range. The key is stepping back and seeing 2018 as a range. A break to new lows that still cannot find buyers will tell one story; a break that traps sellers and vigorously returns to the range could tell a very different story. Right now I'm a bear who is uncomfortable having so much company in that view.
PS - I'm updating this at 8:35 AM EST on Saturday morning. This was originally posted yesterday morning and already has gotten more hits than the majority of my blog posts. That, too, nicely reflects current sentiment.
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