Market Stats

Tonight's newsletter is longer than usual because I think we're at a critical place for the market. I've done some additional research this week and pulled together some information that I think is worth sharing and definitely worth thinking about, even (especially?) if you disagree with my conclusions. I'll discuss some fundamental issues facing the market and of course tie in some technical analysis. Grab a cup of coffee, or something stiffer, and hopefully you'll find this useful for your financial planning for the coming year.

A look at fundamental valuations shows the stock market is once again in danger territory. The annual dividend yield has dropped from 4.7% at the March low to 2.95%, which happens to be the yield for stocks back in September 1929. All stock market tops in the 20th century occurred when the dividend yield dropped to about 3%. Then in 2000 and 2007 the dividend yield dropped to about 1% and 2.5%, respectively, which shows how extended the market became at those price highs when comparing previous yield returns. Folks were completely convinced that it was growth that was important and not dividend yields.

While dividend yields are back down to historical low the P/E ratio is now over 100 and is at one of the highest readings on record (thanks to higher P and lower E). The trailing P/E ratio on operating EPS is currently 26.5. At the October 2007 high it was 18.8. The trailing P/E ratio on reported EPS is 184.2. At the October 2007 high it was 23.4. You might want to reread that last comparison with 2007. Just prior to the 1987 crash it was 20.3. With these numbers it's difficult to understand how people can claim the current market is fairly valued (some claim it's undervalued). Is it really different this time?

The risk for the stock market at these valuation levels is that there are other competing investments, like safer Treasuries, that could get fund managers reallocating their funds, especially if they want to protect this year's gains. These valuations also support the idea that this year's rally is a bear market rally and not the start of a new bull market.

Even though the stock market is overbought, is showing waning momentum, and is sporting high valuations, it can continue like this for some time. Although momentum has been waning it has remained bullish and many have been chasing performance. This is why the market reminds me of 2007 when the market continued to rally in September and early October despite a growing home mortgage default problem. It was a ticking time bomb, yet we were assured that it would be "contained" just as we're being assured today that the financial system is back to health and that the recession is probably over. These assurances are coming from the same people who didn't get it right last time but want us to believe them this time.

In the early fall of 2007 the market simply ignored the red flags, which seemed to be attracting the bulls instead. When the turn down came the buyers kept buying the dips until they realized something was wrong. When the selling started, it didn't take long to completely reverse a 5-year rally. Now we have a 6-month rally that could get completely reversed. That's of course just one scenario.

Once this year's rally from March tops out, and it of course will at some point (if it didn't on Wednesday), there are two possibilities that I consider the most probable. Both of course start with a decline but play out quite differently over a year's time. Secular bear markets, which I firmly believe we've been in, can be grinding affairs. They can go sideways and work off the previous bull market's excesses or they can decline hard to retrace a good portion of the bull market's rally. I believe this secular bear market has at least another 8-9 years to run.

For either scenario (sideways or big decline), history shows us that bear market rallies are often followed by nasty declines. The market in the 1930s is one of the more memorable examples of a big decline scenario while the big sideways scenario was experienced in the 1970s (although after inflation it too was actually a big decline). There were several bear market rallies during the 1930s and each was followed by a new low. I showed the following chart about a month ago but I think it's worth reviewing again, especially considering how bullish everyone has become (Daily Sentiment Index from shows 92% bulls, which is above the 2007 high). Extreme bullish sentiment is a hallmark indication at the top of bear market rallies (all part of that slippery slope of hope that bear markets are famous for).

DJIA 1929-1932, chart courtesy Elliott Wave International

There is of course no guarantee that we'll follow the same path as the one above. It's only a warning of what could come next. But considering that in the 1930s we were dealing with a huge credit contraction that followed the large credit expansion during the roaring 1920s it's not a stretch to say we'll follow a similar path. The difference this time is that we're now dealing with an even larger credit expansion and contraction.

The next chart from the Fed shows how much of a credit contraction we're talking about. Banks are still not lending (and people are not borrowing with abandon as they did for the past twenty years). The credit contraction is what will make the current secular bear market different from the others since the 1930s. Credit is the lubricant for the gears of the monetary system and when the grease is removed the gears grind to a halt. This contraction creates deflationary pressures and no amount of money printing by the Fed can keep up with it. Here's a graphic look at the contraction we're experiencing:

Consumer Credit, 1940-2009, chart courtesy Aspen Graphics/Bloomberg

You can see that consumer credit never declined throughout the period of the 1940s to 2007. It expanded an incredible amount after 1980 (the secular bull market) and now the piper is in the process of being paid. The contraction is huge and it's fast. This is what the Fed is fighting but will lose the fight. This is why this year's rally will not hold.

Walter Deemer puts out a newsletter and he recently included a statement from Bespoke Investment Group (started by two guys who left Birinyi Associates), which stated "We looked at periods where the S&P 500 went from 20% below its 200-DMA to 20% above its 200-DMA in under a year. Since 1928, this has happened only three other times. These occurrences came in 1932, 1938, and 1975, and in each period the reversal took less than six months. Following the prior three occurrences, the S&P 500 was lower one, three, and six months later every time. One year later, though, the average return was 13.3% with positive returns in two out of three periods."

The first thing is to note that those prior three occurrences were in previous secular bear markets. That's very telling since we're now experiencing the 4th occurrence of this kind of 20% move. But what I found intriguing was the last sentence because of the positive returns one year following the decline. This would suggest that instead of heading for new lows (below the March low) over the next year, we'll instead get a pullback into the end of the year or beginning of next and then another rally leg to a new high above this year's. After that could come the new lows below March's low but that's a long way off and we have enough to try to figure out just for the coming year.

Another thing Deemer has been watching is the comparison between our current market and the Japanese market during the 1990s. In the 1980s Japan had the same kind of credit expansion that we experienced from about the mid 1990s to 2007 and now we are repeating the same mistakes Japan made when dealing with over-extended banks and bad assets on their books. Deemer has been looking for the S&P 500 to reach 1055-1075 based on the same percentage gain that Japan's first rally achieved. (He recently raised that target to 1145 based on recent momentum although he fears this market may "fall off the track").

After Japan's first major decline from 1990 to 1992 the Nikkei went sideways for 8 years with big bear market rallies followed by complete retracements. It has experienced four 50+% rallies and is still down more than -70% from its high nearly two decades ago. Their land prices still haven't recovered either--they fell -4.4% Y-o-Y making it the 18th consecutive year of declines. This may be a precursor for what we can expect in our own real estate market.

Tokyo Nikkei Average, 1986-April 2009, chart courtesy

So the point to take away from the above chart is that this year's rally could be completely retraced. Whether or not it continues down to new lows (following the 1929-1932 DJIA pattern) or instead only tests the March low before heading higher next year is the big question. Another rally leg into next year (following a decline from the current rally) would likely be followed by another complete retracement or worse. A strategy of market timing becomes more important now than it ever was during the secular bull market. For at least another 8 years we should ban "buy and hold" from investor's minds.

In the same way our market rallied off the lows during the 1930s, the Nikkei rallies were very strong. Each was accompanied by proclamations that all was well with the world and that they survived the worst. The first Nikkei rally off the 1992 low was about 52% (the same as the 1930 rally and the DOW's rally from March). The 2nd one off the 1995 low was nearly 60% (like the current S&P rally). The 3rd one off the 1998 low was about 63%. I'm sure the bulls were feeling pretty good after each one of those. Each rally was completely retraced and the Nikkei went on to make new lows. The same thing was happening to our stock market in the 1970s where the strong rallies were completely retraced. But considering what our economy will have to go through, as the debt bubble is unwound, it would not be unusual for this year's rally to be followed by new lows into next year.

Now we move to the longer-term view of SPX as a comparison to the Nikkei wave count. I've been calling this year's rally as either the completion of a counter-trend (bear market) rally (dark red wave X), to be followed by a new low into next year, or it's just the first leg of what will be a larger sideways move (pink A-B-C wave count). The latter scenario means we could get a pullback to test the March low or give us a higher low, and then get another rally leg next year. It's way too early to tell which could happen, which is why we'll have to trade the next year carefully and take profits on trades when offered. Just keep in mind that both scenarios call for a significant decline from here (one that will be lower in one, three and six months from now).

S&P 500, SPX, Weekly chart

Referring to the daily chart below, I've noted in the recent past the potential importance of 1070 for SPX. This is the price projection for the 2nd leg up in the rally from July to August 8th. The 2nd leg up is from August 17th and equals 62% of the 1st leg up at 1070. The next most common relationship is equality between the two legs which is at 1127.19. This upper target is also close to 1121.44 which is a 50% retracement of the 2007-2009 decline. So if the rally has more upside left to it we could see it head to the 1121-1127 area into October (shown with the dashed pink line on the daily chart). The bears want to see a break below 1035 which would indicate we may have already seen the high. A break below 992 would confirm a top has been put in.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1070
- bearish below 1035 and more bearish below 992

The daily chart looks a little busy with Fib price projections but I want to point out one other projection that could be pointing to a continuation of the rally into October. If we consider the rally from March to May as the first leg of this year's rally then the second leg up is from July. At 1132.70 the second leg up would equal the first leg up, which is close to the 1121-1127 levels discussed above and not far from the 1145 level that Walter Deemer is considering. This gives us a target range of 1121-1133 for now and I would be able to zero in on a good target once the rally progressed into that zone.

But first the S&P needs to close above 1070 for more than a day or two because there's another reason SPX 1070 (actually 1069) is an important level. A more important level could be SPX 1076. I've referred to the Gann Square of Nine chart in the past and how it shows important levels. The chart is created by starting with the number 1 in the center and then spiraling out clockwise to build the chart. Numbers on the same radial to each other are considered to be "square" to one another and the market very often reacts to these levels. I've copied a portion of the Sof9 chart to show some key SPX levels (I apologize for the very small print but I needed to squeeze it down to fit the page).

Gann Square of Nine chart, portion showing key S&P 500 levels

At the top I've highlighted 1576, 1136 and 768. The October 2007 high was 1576 and the October 2002 low was 768. SPX 1136 is right in the middle and notice how close it is to the price projection on the daily chart at 1132.70 (for two equal legs up from March). If the rally continues I'd say there's a good chance that's where SPX is headed. I also highlighted the March low of 666 near the top of the chart.

At the bottom of the chart, opposite to 1576, 1136 and 768, is 943 and 1069. On the other radial off 666 is 1076. The January 2009 high was 943 and the market had been trying to close above 1069 for a week before yesterday. Wednesday's high was 1080 but it was unable to hold above 1076 for even an hour before giving it up into the close. This 1069-1076 is the zone that the bulls must conquer in order to open up the door to the 1121-1136 area.

Moving in a little closer to see what to watch for on Friday, SPX had been bouncing around its trend lines the past week but then let go hard yesterday and today. It found support at the 38% retracement of the leg up from September 2nd and it's possible that's all we're going to see for now. Another rally leg into early October is possible from here so don't make any assumptions that the top is in. I think it is but not if SPX gets back above 1070. I think the market is ready for a bounce to correct the leg down from Wednesday's high but then continue lower. Watch for support at the uptrend line from July, currently near 1040. A drop below 1035 would spell trouble for the bulls.

S&P 500, SPX, 60-min chart

Since the May-June highs the DOW was unable to push through the trend line across those highs, including on Wednesday. As shown in pink, there is the possibility we'll see one more attempt at a new high into early October (deja vu all over again with 2007?), especially if the uptrend line from July holds, as it did today. A break below 9650 would spell trouble.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 9920
- bearish below 9650 and more bearish below 9250

NDX wasn't able to reach its trend line along the highs from May and also fell just shy of its 62% retracement of the 2007-2008 decline, at 1773. The pattern is the same as the blue chips--the possibility exists for one more leg up to finish its rally from August (to give us a 5-wavve move up from the August 17th low). As with the others, the negative divergence at the new high, along with the oscillators rolling over from overbought, looks bearish. If the market is able to turn back up for "one more new high" I fully expect the negative divergences to continue.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1754
- bearish below 1640

When looking for market direction it's very tempting to say look no further than the semiconductors. They're into everything and therefore a great indication of the health of the economy. After yesterday and today I'd say they're projecting a bad omen for the economy. The small rising wedge pattern for the rally off the August 17 low has been broken to the downside which suggests we'll see a quick retracement of that wedge (back below 300). Wednesday's rally also took it above the larger rising wedge pattern for the rally off the November 2008 low. Wednesday's candle was a shooting star and it was followed by a large red candle today. That's a reversal signal, especially after the throw-over finish above the larger rising wedge pattern. The wave count for its rally from July counts as complete. If I were to make a trade today based on just one chart, this is it and I'd be short and hanging on for the ride from here. Discipline dictates otherwise but that's how bearish I feel about this chart.

Semiconductor index, SOX, Daily chart

One reason why discipline still requires caution is because we could see another rally attempt in the blue chips that's not matched by the semiconductors or techs (for a bearish non-confirmation). That's just speculation but we do not yet have a strong enough sell signal in the others to throw caution to the wind and get short in a big way. But the SOX index tells me to cash in my chips if I had any long positions.

The RUT is giving me a similarly bearish signal by dropping back below the trend line along the highs from June. That line should be support and if the RUT is unable to climb back above it quickly (near 609) it is a bearish signal. Below 590, the August 28 high, would suggest the high is in.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 625
- bearish below 590

Many are starting to discuss the potential tidal wave of bank failures facing us. There are conservative estimates that suggest over we will see more than 1000 banks fail in the next year or two. The total cost to the FDIC could be as much $400B. They currently have about $10B available and will need to borrow the balance. To put this into perspective, the FDIC had to borrow $15B 20 years ago during the savings and loan crisis. We're still paying off the 30-year loans for that one. Now it's anticipated we'll have to pay off another $400B over the next 30 years just to bail out collapsing banks. Ugh, you ready for that one to pass along to our children as well?

The banks have been relatively week since May and now we've got a price pattern that looks complete to the upside. The poke above the top of its flattish rising wedge pattern last week (throw-over) was followed by a dip back inside the wedge (sell signal #1), a bounce back up to the top of the wedge on Tuesday and today it dropped below the bottom of the wedge (sell signal #2). It's noteworthy that the bottom of the wedge is the uptrend line from March so this is the 2nd time it has broken below it. Could it be rescued once again? Of course, but the more it beats on that support line the weaker it becomes.

Banking index, BIX, Daily chart

I used the broker index recently because it has a very nice rising wedge pattern off its November 2008 low. I thought we got a sell signal off a minor poke above the top of the wedge last week but then it climbed back above it this week. This has been followed by a stronger break down inside the wedge so we've got a stronger sell signal. We could still see one more poke higher, especially if there's an effort to hold the market up into next week, but this is another index that's screaming at me to short it.

Broker/Dealer index, XBD, Daily chart

There's not much of a change to last week's chart on the home builders or transports so I'll save them for next week. They should act in synch with the broader market.

Wednesday gave us a key reversal day for the stock market (from the previous day we got a higher high and then lower low with a lower close). We got just the opposite for the US dollar and this could be an important confirmation of a market turn. Equities and commodities have been trading counter to the dollar so if the dollar is getting ready to rally it could be an important reversal signal for stocks and commodities. Starting with the longer-term view of the dollar, the weekly chart below shows 3-wave a-b-c pullback from its November 2008 high (when several stock sectors bottomed).

U.S. Dollar index, continuous contract, Weekly chart

Its decline from March looks to be completing the last of a 5-wave move down which sets up a reversal. Even from a sentiment perspective the dollar is ready for a reversal. While there are 92% bulls in the stock market, there are 97% bears in the dollar which makes the time ripe for a reversal in both. So we've got the pattern and sentiment supporting the idea that we're very close to the start of a strong rally. It will take a break above 79 to confirm the bottom is in and for now the trend is still down but I believe the US dollar is getting ready for a strong reversal back up.

U.S. Dollar index, continuous contract, Daily chart

As to why the dollar would rally, which is believed by only 3% of traders (according to the Daily Sentiment Index), we must keep in mind that the value of the dollar is relative to other currencies. All fiat currencies may lose value together but the dollar will continue to be perceived as the safer currency, especially if the global economy continues to tank. That would cause others to prefer to have their money parked in U.S. dollars rather than other currencies.

Another possible reason why the dollar could rally strong is because of the massive amount of short covering that could come from being deeply oversold (like the equity market was in March). It's possible, especially with the Fed holding down their rates, that many traders are now using the US dollar for a "carry trade" the way they were using the Japanese yen for so many years. The carry trade means people borrow US dollars and invest in some other country's currency. It effectively means they're shorting the dollar. Buying the EUR/USD forex pair is also shorting the dollar (and buying the Euro). So what happens when these trades are unwound because the dollar's value begins to rise? Yep, massive short covering. It will catch most dollar traders leaning the wrong way.

Oil kept pounding on its uptrend line from February since July so it's no great surprise it finally gave way to selling. The strong break over the past two days looks bearish for a trip at least down to Fib projections at 60 and possibly near 50 before a bounce back up. If the dollar is headed for new highs into next year it could be painful for commodities.

Oil continuous contract, CL, Daily chart

Gold bulls have a chance here to drive gold a little higher before at least a larger pullback. The broken downtrend line from March 2008 was tested today near 991. Closing back below 1000 may be depressing but it's not lost yet. A close below 990 would be bearish and below 974 would be a stronger signal that the high of the bounce is in, especially if the dollar is rallying.

Gold continuous contract, GC, Daily chart

Looking at today's economic reports, the unemployment numbers are not worth paying attention to because, well, to quote a representative from South Caroline, "you lie!" We all know the unemployment numbers are much worse than that being reported to us. The real unemployment number includes those people who don't have jobs, or jobs paying what they used to make, and can't help our economy by paying their mortgages and buying products.

The number of sales of used homes in August dropped -2.7%, the first decline in five months. This was a surprise number since most expected an improvement in sales for the last month of the summer and before the $8000 credit to first-time buyers expires.

Friday's reports could move the market if the durable goods orders are much different than expected, especially if they're worse. A lot of people are feeling very edgy about the stock market rally and are wondering just how much it has gotten ahead of itself. The Michigan Sentiment and new home sales also have the potential to move the market.

Summary I started off tonight's newsletter with a look at some fundamental concerns about the stock market rally, such as the valuations which are significantly higher than we've seen in a long time--higher now than at the 2007 highs. There is a lot of bullish expectation by the buying public (which includes fund managers), as confirmed by the Daily Sentiment Index at 92% bulls. Many say they expect a correction but very few are actually short the market. However, insiders (company executives) are not feeling the same bullishness. We've heard the numbers before--insider sellers are swamping insider buyers. The latest data I've seen, for the two-week period ending last week, there were $471M worth of sales vs. $4.6M in purchases. The sales number almost doubled the previous week's report. Is it tax selling or is getting out while the getting is good? Only you can decide which it might be. I like to follow the insiders.

I hate to keep dwelling on the things that are still wrong in our economy and stock market but I keep hearing so many people saying the economy is fundamentally sound and that the bottom is in, or worst case is we'll only get a double-dip recession. These are expectations based on the past 30 years or so. We are instead dealing with a once-a-century phenomenon with a severe credit contraction following a super-sized credit expansion. Let me summarize a bit and throw out a few reasons to be wary of the "recovery":

1. Housing continues to struggle, regardless of the positive spin by the press. Nearly 80% of new residential mortgages have benefitted from some form of government support. We can only guess what's going to happen if and when the government ends or reduces their support. Currently, the delinquency rate on adjustable-rate mortgages has climbed to 18% while fixed-rate mortgage delinquencies are up to 6%. Rents are decreasing for the first time in 17 years. There are reports of more people moving in together to share housing costs and the continued building of housing is exacerbating the glut on the market.

2. Consumer credit is contracting at a rate not seen in 65 years. Since the early summer both bank credit and M3 money supply in the U.S. have been contracting at rates not seen since the Great Depression. This significantly raises the probability that we'll slip back into not just a recession but more likely into a debt-deflation.

3. A statement from Global Trade Alert (GTA), a team of trade analysts who are backed by independent think tanks, the World Bank and the U.K. government, says of the contraction in credit and M3: "There has been nothing like this in the USA since the 1930s." The GTA has also reported that governments have planned 130 protectionist measures, including state aid funds, higher tariffs, immigration restrictions (immigrants are starting to get the blame for high unemployment) and export subsidies. Obama has already started a trade war with China over the tariffs on their tires. The unions are feeling emboldened after winning the tire concession from Obama and they've since filed several more trade concessions. We've got an even greater trade war about to start with Canada. It appears we will have to relearn everything we learned after the Great Depression about what not to do in times of economic crisis. There is ample evidence that we are repeating the mistakes of the past and creating the same patterns--patterns that I study in the stock market which is why I continue to sound the alarm bell and warn people not to get sucked up into this rally thinking it means anything more than relief to the last wave of selling. When it reverses it could do so very quickly. Again, follow those insiders.

4. The last time the stock market enjoyed the kind of rally we've seen this year was in 1930 right after the initial crash. That rally was followed by new lows. Stock market cycles are driven by social mood swings. The acrimony and lack of civility that we see popping up all over the place is an indication of a souring social mood and will be reflected in another swing back down in the stock market.

5. As for all that "cash on the sidelines," as of the end of July mutual fund cash holdings were at 4.2% of total assets, which is very close to the all-time low of 3.5% set in July 2007. The August reading will probably be even lower than this past July's.

6. In August, 54 of 55 top economists polled by Bloomberg said the economy will grow in the 3rd quarter and all 55 said the economy will grow in the 4th quarter and first half of 2010. The last time they were unanimous in their bullishness was heading into the fall of 2007. Their opinions tend to lag the stock market (they were unanimously bearish in February-March).

7. For the week ending September 12, total US railway car loadings had dropped -22% Y-o-Y, which is on top of a -4.0% Y-o-Y decline a year ago. They are back down to 1993 levels. The Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities, is at a 4-month low with much of the blame going to the slowing Chinese demand. The index, which gauges the cost of shipping resources including iron ore, cement, grain, coal and fertilizer, fell -3.1%. This is its 8th straight drop and is now at its lowest level since May. This is a great way to measure global economic health and from these numbers it doesn't sound too healthy. You wouldn't know that from the stock market.

8. Other government assistance programs will continue to have unintended consequences, including the completed cash-for-clunkers program. It was deemed a great success because of the large increase in automobile sales. But it was a flash in the pan and it may have created a bigger pullback in demand than would otherwise have been seen. reports that the best month of the year could be followed with what looks like will be the worst month of the year. So all of our tax dollars went to help people who may not have intended to buy a car get saddled with a loan that they may not be able to pay and now we'll have an even slower car sales period coming. If this is deemed a successful government program I'd say we have a lot of work to do.

9. The S&P has now rallied back up to where it was in early October 2008. Back then the consensus for earnings for the 3rd quarter of 2009 was $26. Now the current quarter's earnings is expected to be $14. Just think about that for a moment--'E' has been cut in half which doubles the P/E ratio.

10. In August both Citigroup and Bank of America reported their highest credit card default rates since the recession began.

11. Home sales in Southern California plunged 10.8% sequentially in August as the inventory of cheap foreclosed properties dried up.

12. The S&P rallied +60% from its low 6 months ago.
-- +60% from the October 2002 low took nearly 3 years to July 2005.
-- +60% from the October 1990 low took more than 3 years to January 1994
-- +60% from 1982's low was almost a year later
The kind of move in the S&P this year didn't even happen in the 1930s (although the DOW achieved the same +52%).

An "active Fed" like we've seen this year has no precedent in history. It can't be known how long the pattern will take to complete but there is a strong probability that it will. The best the Fed can do is to delay the inevitable.

I could go on. I know many of you think I'm beating a dead horse but I think it's vitally important to understand some of the "markers" of a bear market rally vs. a real bull market rally. This is critical to your financial survival. Considering the multitude of factors I've identified, I'm looking for topping signs, even if it takes a month or two or three to find that top. Surprises will soon be to the downside and may have already started. The question is whether we'll get a similar setup to the one we experienced in October 2007 or if instead we've already seen the top put in on Wednesday.

China's Shanghai index has often been a leading indicator of where the global market is heading. It bottomed in November 2008 while many other markets bottomed in March of this year. It looks like it might have topped in early August. The bounce into mid September looks like a correction of the 1st leg down and may be ready to resume its decline. Could our market be far behind?

Shanghai index (SSEC) vs. S&P 500

I'll leave you with a final chart that I like to watch--the NYSE vs. the advance-decline line. It's not a great timing tool but it's very good for either confirming a price move or warning of divergence. The top chart is the NYSE and shows the rise off the March low. The bottom chart shows the 10-dma of the advance-decline line and it reached the same level as previous highs (horizontal blue line). What's significant here is that the new price highs are not being met with new a-d highs which means the rally is becoming more narrowly focused and is not enjoying the participation of all the stocks. If the 10-dma breaks its uptrend line from March I believe it will be confirmation that the rally has finished.

NYSE vs. Advance-Decline Line

Stay cautious through the rest of this month as the market may be held up for end-of-month/quarter. It could get interesting after that.

Sorry for the extra long report tonight--I know our time is precious and it's hard to read everything available to us. But I think we're at or nearing a very critical spot for the market and wanted to make an attempt at identifying why you should be extremely cautious about the long side of this market. Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1070
- bearish below 1035 and more bearish below 992

Key Levels for DOW:
- cautiously bullish above 9920
- bearish below 9650 and more bearish below 9250

Key Levels for NDX:
- cautiously bullish above 1754
- bearish below 1640

Key Levels for RUT:
- cautiously bullish above 625
- bearish below 590

Keene H. Little, CMT