The problem with a Goldilocks scenario is twofold.
The first problem is that it is a fairy tale, not reality.
The second problem, as best I can tell, is that the other characters in the story are bears, not bulls.
Perhaps that is why investors were not pleased with all that Goldilocks chatter Friday morning.
Or perhaps that was why, all of a sudden, my inbox became flooded with folks who were angry with me for missing the rally.
Some folks picked on me, while others chose to pick on the indicators, saying they were clearly not useful.
So I thought it was time we stepped back and reviewed the indicators not from a day-to-day perspective, but rather from a trend perspective.
I have been harping away, almost daily, about the lack of expansion in the number of stocks making new highs.
I have shown that chart here repeatedly so I will not show it again, although it did fail again on Friday morning.
I have also shown how the number of stocks making new lows continues to expand, not contract. Friday was no exception, as new lows rose once again. That too is not bullish.
However, when we put the two together and plot them on a 10-day moving average, we can see a trend that has developed over time.
That trend is one of lower highs as the market has risen.
This translates into a market that is being carried higher by only a handful of stocks, not a vast majority.
Think of building a structure with Tinkertoys: the bigger the base, the sturdier the structure; the smaller the base, the shakier it is.
From a momentum perspective, the oscillators on both the
have refused to make higher highs. We have seen that before, most recently last summer, when the NYSE oscillator peaked in late May, had an equal high in July and simply could simply not make a higher high again as the market averages made higher highs into early August. This ultimately resulted in the October decline. Strong markets have momentum and follow-through. I do not see either in the current market.
But the one that keeps catching my eye is the McClellan Summation Index.
This is a calculation using the advance-decline numbers. Think of it like the third or fourth derivative of the A/D line, as an intermediate-term momentum indicator of the advance/decline line. The cumulative advance-decline line has been making higher highs, but here I show a chart of the McClellan Summation Index with the
, and you can see the McClellan Summation Index made its high back in late 2004!
More recently, the divergence has become even more glaring, as it peaked this year in February and has not been able to mount a rally since. Once again, this speaks of the narrowness of the rally.
Finally, I have discussed breakouts before and have explained that a true breakout is one that breaks out and moves well away from the pattern it broke out of. A questionable breakout is one that breaks out and mills around. I have likened it to running away from home and going to a neighbor's house instead of to another state. You didn't really want to go anywhere.
I was wrong in thinking that the 10-year notes would stop around 4.90% on a yield basis (they haven't), but let's take a look at the chart of the yield on the 30-year bond to see what a real breakout looks like.
Compare that to the recent breakouts folks are pointing to in stocks. I see no comparison: one breaks out and runs; the other breaks out and acts as though it can't wait to go back home.
There will come a time when the indicators are all in an oversold condition, the sentiment of the market is leaning very negative and the number of stocks making new lows refuses to expand anymore. We always get there. But that is just not where we are right now.
Helene Meisler writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At the time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback;
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