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New highs are bullish, but…

Summary:
Mid-week market update: It is said that there is nothing more bullish a stock or an index can do other than to make new highs. Both the DJIA and the SPX made fresh all-time highs today. While that may appear to be bullish, there are plenty of warning signs beneath the surface that this advance may not be entirely sustainable. One of the missing ingredients in this rally is momentum. The SPX is exhibiting a negative 5-day RSI divergence, indicating flagging momentum even as the index made new highs. In addition, the VIX Index fell below its lower Bollinger Band, indicating an extremely overbought condition.  Other divergences Another warning sign can be seen in the risk appetite in the credit markets. Even as stock prices made new highs, the relative price performance of high yield

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Mid-week market update: It is said that there is nothing more bullish a stock or an index can do other than to make new highs. Both the DJIA and the SPX made fresh all-time highs today. While that may appear to be bullish, there are plenty of warning signs beneath the surface that this advance may not be entirely sustainable.

One of the missing ingredients in this rally is momentum. The SPX is exhibiting a negative 5-day RSI divergence, indicating flagging momentum even as the index made new highs. In addition, the VIX Index fell below its lower Bollinger Band, indicating an extremely overbought condition.
 

New highs are bullish, but…

Other divergences

Another warning sign can be seen in the risk appetite in the credit markets. Even as stock prices made new highs, the relative price performance of high yield (junk) bonds did not confirm the advance.
 

New highs are bullish, but…

Sentiment flashes warnings

Sentiment models are becoming excessively bullish. The latest II sentiment readings show that % bulls have recovered. This is not an outright sell signal, but some caution is warranted.
 

New highs are bullish, but…

Our normalized equity put/call ratio is also at or in the complacency zone, which is contrarian bearish.
 

New highs are bullish, but…

Where’s the breadth thrust?

The analysis of the top five sectors of the market reveals lackluster leadership. Since these sectors make up nearly 70% of index weight, the market cannot advance in a sustainable fashion without signs of strong leadership from a majority of these sectors.
 

New highs are bullish, but…

In the meantime, short-term breadth is already at overbought levels as of Tuesday night’s close, and readings will be even more extended based on Wednesday’s rally.
 

New highs are bullish, but…

The combination of all these factors argue for a short-term stall. My inner trader entered into a small short position on Monday, and he may add to that position should the market strengthen further.

Disclosure: Long SPXU

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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