Chart update for end of 2014

2014 is over. The year market another up year for SP500 and another year without -10% correction. Records are being broken. Yet, the theme for 2014 for increasing market divergence across the sectors:

Fro longer term view, the similar divergences are shown for 2011 just before the market drop but the divergence have lasted now for 12 months. Market is stretched - and this is an understatement.

Could the market stretch further. It is possible but unless the divergences are repaired, any rally from here is on borrowed time.

Weekend update 11/28/2014

Black Friday closed with ominous note: Breath deteriorated substantially and sentiment turned even more defensive. The backdrop for the turbulence is the plunge oil price the directly hurts energy sector and related high yield bonds. The high yield dropped and treasuries rose. The continuing divergence between the high yield and treasuries is the most dangerous alarm of rising risk aversion that is yet to affect the large cap stocks. Other divergences:

Against the breath weakness across variety of assets, Friday also showed a sharp move in treasuries that has previously indicated near term weakness in stocks:

All indications point to weakness in the coming week.

Another up week with weakening breath

Looking at SP500 price action, this week was another strong up week. Momentum was fading a bit but irrelevant Chinese interest rate news  drove the market up on Friday. The gap up ended in doji in many indexes (see for SOXX example below) sets up potential for reversal on Monday.

Figure 1: Gap up and doji. Exhaustion?

Is this the exhaustion that marks the market reversal? Next weeks will tell. Meanwhile, here are some clues:

1. Skew > 135 for both Thursday and Friday. Historically this has meant high risk for correction.

2. Even with this week rally in large caps, market breath is weak.

Figure 2: Breath is weak.

3. Defensive sectors are still leading.

Figure 3: Defensive stocks stronger than cyclicals.

4. Oscillators are starting to roll over. This is too already to call. Typically, the oscillators will need to turn negative before an air pocket. But given the nervousness in the market, fast drops cannot be ruled out.

Figure 4: McCellan and MACD are starting to roll over.

Overall, we have a strong set-up for reversal in next few weeks.

Incremental high at weaker breath

US large caps are still advancing but the rally is getting hollower. The market breath is not a timing indicator but reversal is getting likelier by the day.

Figure 1: Market breath as of 11/20/2014

Market breath is bad and deteriorating

Market breath or uniformity is one of the most consistent early warnings of trend change. Currently, the breath is flashing alarm. The reversal may not be imminent but history teaches that it is coming.