Market Halitosis

I did not create this Price Is Truth blog to specifically talk about stocks or Technical Analysis although I have many thoughts on the subject.

From time to time however, I may post thoughts about current market conditions if they can illustrate a point or if I feel it is worthwhile. This is one of those times.

You see, in a strongly trending market- up or down – certain technical indicators are rendered useless and others take on additional import. One long term indicator I have been watching since November of 2012 (yes – that is a long time to wait for a trigger) is the Ratio Adjusted Summation Index (RASI) which you can pull up on Stockcharts.com as $NYSI.

This is an adaptation of the standard and widely watched market breadth indicator, the McClellan Oscillator ($NYMO) and the Summation Index ($NYSIT) developed in 1969 by Sherman and Marian McClellan. If you wish to read more about this  – click here for information found on the most excellent McClellan Financial Publications website.

Anyhow back in November 2012 they put out a weekly Chart in Focus article that basically stated that most significant tops in the market could not come without a divergence between new highs and the RASI failing to hold the +500 level.

At the time the article came out the RASI had dipped below the 0 line and had bottomed and Tom McClellan (editor of both The McClellan Market Report and son of Sherman and the late Marian McClellan) speculated that the summation index would show a “neat trick” and provide the indication of fresh liquidity to fuel the market advance to new highs. He was proven correct.

However the end of the article provided another bit of advice (emphasis mine):

It is at the moment when the RASI cannot climb back up +500 that its other big magic trick becomes evident“….”Thus far, we have not seen such a failure yet.  It is really not typical for the stock market to see an important top at a really high Summation Index level, like the raw value high of +3689 seen back on Sep. 21, 2012 (RASI equivalent: +888).  A much more normal resolution is to see a dip down toward neutral like what we have just seen, and then a failing attempt for the RASI to climb back up above +500If we see that unfold in the next few weeks, with a failure by the RASI to climb back up above +500, then we’ll know that the typical weakness of the first year of a new presidential term is playing out according to the normal script.”

As it turned out, the RASI briefly stalled out at the +500 level but the next week powered higher and this indeed was the exact beginning of the 20%+ rally we have experienced since late November.

We are now in a situation that seems to suggest the long awaited divergence is coming to fruition and that this absolutely massive rally (and possibly even the longer 4+ year rally off the 666 SPX lows) may be showing it is ready to give up the ghost.

To wit, please see the most succinct and excellent chart by Jackdamn on Stocktwits that appeared yesterday:

nysi - nya

As you can plainly see, the $NYSI has failed at the +500 level after the $NYA has made marginal new highs. While this looks less than significant to the untrained eye, I encourage you to look at the July 2011 time frame to the left of the chart at the other time that this setup showed itself (although the NYSE did not make all time highs that time).

Please note that the NYSE fell from 8500 to 6500 in +/- 40 trading sessions (~25% drawdown). With the NYSE up 48% ($SPX up 59%) from those Oct 2011 lows we are now at a very tenuous moment.

This bad breadth could be a real nail in the coffin for the 2009-2013 bull run or it could just be one more indicator or divergence that gets blown away by POMO injections of liquidity and Central Bank largesse.

Time will tell, but I will wind down this post with a comment that Tom McClellan just wrote in his most recent Chart in Focus article that I take as a bit of a warning and a bookend to his Nov 2012 article:

“One of the topics that we have covered recently in our McClellan Market Report newsletter and our Daily Edition is the way that the NYSE’s A-D Line is finally showing divergences relative to prices.  And that message is getting amplified by seeing the Ratio-Adjusted Summation Index (RASI) turning down at the +500 level, which is a sign that the push to marginally higher price highs does not have liquidity behind it.  There are really useful messages that one can take from market breadth data, when sophisticated indicators and proper interpretation are applied. ”

His understated tone belies what I believe is the true import of this signal. I waited 9 months for it, but most impulsive BTFD bulls would not understand this type of patience and would probably chuckle at my conclusions.

I respond to that thought with an old saying: Revenge is a dish best served cold.

Don’t say you were not warned.

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One thought on “Market Halitosis

  1. stef540 says:

    Wondering blog Max!

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