Is The Market Now Topping? Here's My Tell.

With the market hitting new highs (the Dow) or closing in (for the S&P 500), the topic du jour for the past couple of weeks has been whether or not this rally can continue.

In my last post, I noted that JNK, the SPDR High Yield bond index ETF, was dropping while the S&P 500 was continuing upward. Since JNK and SPY have a high correlation (they tend to move in the same direction), something was due to give. Either SPY was due a selloff, or the correction in JNK was done and it would soon follow SPY up.

As shown in the chart below SPY, (the red and green candle chart) has moved on to new highs since the downturn started in JNK (shown by the vertical white line). SPY did pause a bit to digest the sequester non-event, but it didn’t even drop to its support level, shown by the longer up sloping white line. And, in fact, JNK did resume a modest uptrend:

spy chart

Chart: FreeStockCharts.com

Bottom line:  SPY appears to have shrugged off two negative inputs, a drop in high yield bond demand (lower price for JNK) and completely shrugged off the sequester. This leads me to my next market indicator to watch.

The market seems to go through four distinct cycles:
  1. Up on bad news
  2. Up on good news
  3. Down on good news
  4. Down on bad news

It seems to me the market is still in phase 1, up on bad news, and hoping to get to 2, meaning news becomes consistently good. This is not to say that all current news is bad, by any means. In fact, we’ve had some pretty good economic news lately. But when you include political events, news has been a mixed bag. And when confronted with bad news, the market is shrugging it off. Slow earnings growth?  No problem, it will get better. Sequestration? No problem, it’s just politics. Italian election? No problem, the ECU will rein them in.  And on really good news - the strong   ISM report -  the market is having really good days so far.

One easy way to follow the economic news is to use MarketWatch’s economic calendar. On a daily basis you can track economic reports and see the market’s reaction. I like to look at the data at the end of the week for a bigger picture of the data and market trend.

This leaves the more subjective political news. My observation is that the market is shrugging off nearly everything political. Perhaps the first crack in our current rally will be when the market actually reacts negatively to what would seem to be negative political news.