The trend remains up. When trends are steady and long-lasting, traditional analysis methods break down. Divergences which typically lead to selling get ignored. Key laggards which offer negative hints of things to come get ignored. Bad news gets ignored.  

Let’s go over some key divergences that are in place which can play a key role in a market reversal.

Russell 2000 vs. S&P 500: The Russell leads up and down. The S&P has made higher highs recently, but the Russell has not.

S&P 500/VIX vs. S&P 500: When the difference between the S&P and the VIX reaches a high level (relatively speaking), the market tends to pull back. A double top may be forming.

Copper vs. S&P 500: When the market makes a higher high but copper makes a lower high, the market tends to correct. Such a divergence has been playing out the last two weeks.

All of the divergence mentioned above does not have to play out at all.  It can simply reverse and play catch up to the SPX. In order for this to confirm we need to see the SPX begin to make lower lows and lower highs breaking through key support areas.  That’s what I will be watching in the coming days.

The Dow Transports continued to underperform the S&P 500, failing to confirm the upward trend in broad market indices.

Underperformance is becoming clearly evident in the Russell 2000 Small Cap index, another gauge of risk in the market.   Technical indicators for the benchmark are also rolling over, implying waning momentum as the market nears a potential peak.

On Friday, Copper, an often looked to leading indicator of market direction, plunged well below the 20-day moving average, the dividing line between short-term strength and weakness.   The commodity continues to remain on a technical sell signal, even though seasonal tendencies remain positive through to May.   Underperformance compared to equities has also become evident

Still, aside from the above warning signs that suggest investors should maintain a cautious stance, the trend remains unbroken to the upside on the S&P 500 Index.   The tight rising trend channel, along with the 20-day moving average, has yet to be violated.   Overbought indicators continue to prevail, failing to generate sustained sell signals that have become apparent on other benchmarks.   Clearly no indication to become bearish has been presented, but rather reason to be cautious and perhaps even prepared for a correction remains the best thing to do.  Markets remain vulnerable, but it remains yet unforeseen what will shock equities lower.

With the negative move in equity markets on Wednesday, volume increased.   Volume according to the S&P 500 SPDR ETF (SPY) surged to levels last seen in December.   Volume has been dismal since the year began as conviction waned.   The increase in volume above that of the recent average indicates that investors are more committed to selling than buying at present equity levels.   The negative volume was particularly evident in the stock of Apple, which had charted all-time highs earlier in the session before the bubble burst and the stock reversed.   The stock price of this technology giant had gone parabolic over the last two months and it was inevitable that the rapid pace of gains was unsustainable.   The key reversal in Apple, as well as in the broad market, could mark a peak to the present up-leg in equity markets as a period of consolidation/correction plays out.   Despite the move lower, the tight rising channel held by the S&P 500 and the Dow Jones Industrial Average remains intact and the rising 20-day moving average remains intact.

The market is noticeably de-risking, repositioning away from benchmarks like the Russell 2000 and the Dow Jones Transportation Average.   These benchmarks have shown signs of underperformance since the end of January, reiterating the waning momentum of equities following the almost 2-month grind higher amongst major indices.   The Dow transports has now lost over half of the relative gains it achieved against the S&P 500 since the beginning of October.   Cyclical sectors, such as industrials and materials, which had been stellar performers to open the year, are now showing significant signs of underperformance with a deteriorating technical profile.   Technical evidence has suggested a correction for some time and it appears that the equity market declines are finally being realized.   Recent divergences in bond and currency markets compared with that of equities remain intact as bond prices and the US dollar maintain levels of strength, contradicting the positive move in equities.

As well, it’s not just US based markets that show waning momentum.   Markets in Europe are also showing signs of consolidation following a peak at the beginning of the month.   Bottom line is that markets are showing convincing evidence of rolling over, suggesting that selling pressures will re-emerge following an almost 2-month hiatus in bearish trading activity.

The month of February is a seasonally negative month; therefore a correction by as much as 3% to 5% would not be unreasonable, allowing major benchmarks to retest significant moving averages, such as the 50-day moving average.  Be ready for the unexpected.

There will be no post on Friday and Monday.  Enjoy the holiday weekend!

The market sold off last Friday when a bailout of Greece was not finalized. Then yesterday the market jumped when conditions were agreed upon. Then today, the market was weak most of the day. Volume was light and there were no outstanding catalysts to chase buyers away. It was just a weakish day within what has become a tight consolidation period. Then favorable news regarding Greece appeared, and stocks jumped higher.

The market is not very correlated right now. This results in outliers even when the indexes are traded quietly. You can not justify holding a stock that’s dropping just because the overall market is holding up. Last year you could get away with that for a period of time. This year is a different story. Last year, if the market was flat, most stocks were flat. This year, if the market is flat, there are big winners and losers.  

On the surface, the S&P 500 Index has a strong positive intermediate uptrend. In addition, its short term momentum indicators are overbought, but continue to trend higher.

However, a closer look at sectors and other equity markets shows that only a few sectors are moving higher and fewer are outperforming the S&P 500 Index. Following is a study of various markets and sectors that already have shown significant negative rotation during the past 2-3 weeks based on short term momentum indicators and strength relative to the S&P 500 Index. February has been a cruel month for these sectors and markets. . All have additional short term downside risk.   Transports, Banks, Semiconductors, Materials and the agriculture sector.  The U.S. Dollar is showing technical signs of a short term bottoming and the Euro is showing technical signs of a short term top.  The dollar is key here as its at an area of resistance. A break above would put selling pressure on equities and commodities.

Despite the gains in equities on the day, confirmation of the move in the Euro and bonds remained absent.  The 20-Year Treasury Bond Fund (TLT) followed through with gains from Friday, posting a marginal return of just over a tenth of a percent despite the apparent risk-on mentality of equity investors.   Yields of 10-year treasuries remain within a trading range that has persisted since November.   As well, the Euro traded lower, failing to regain the lost ground charted on Friday as Euro-zone uncertainties once again escalated.   Technical indicators for the Euro have now charted sell signals and price action appears to be in the early stages of rolling over.   Similarly, the US Dollar appears to be charting a bottom with momentum indicators showing signs of curling higher.   Any dollar strength at present levels could further deflate the waning momentum in equities .

In addition to the divergence compared to equities in the bond and currency markets, copper also traded lower.   Investors typically look to copper as a leading indicator to equity market moves.   That leading indicator topped last Thursday and momentum indicators are providing sell signals.   Relative performance versus the S&P 500 also peaked at the end of January and the commodity is showing signs of underperformance against the equity benchmark.   Seasonal tendencies for copper are typically positive through to May, outperforming the market for the first five months of the year.   Therefore the fact that relative performance is showing signs of sluggishness within its period of seasonal strength does give doubt to the strength of risk assets, such as copper, over the short-term.   The Semiconductor Index (SOX), another benchmark of risk sentiment in the market, is also showing relative performance leveling off against the market after peaking at the beginning of this month.    Momentum indicators are providing sell signals, warning of the fact that investors are starting to become risk averse give the dramatic market run since mid December.  Both Copper and the SOX index are finding support at their 20-day moving average lines, the dividing line between strength and weakness in the short-term.

Barron’s cover page over the weekend DOW 15,000″  I don’t have too many doubts that it’s is an attainable level over the next two years. I do have a big problem throwing a lot of cash at the market here. I mentioned 1350 to 1370 might be my best case short term S&P target. Apple also hit $500 today.  The more people talk about these lofty targets, the quicker we will see a pullback. Investor sentiment is off the chart bullish (most often leads to a market selloff) and volume has evaporated showing lack of conviction. I don’t know if this means the market is just taking a break before a last thrust higher or a pause before the market starts taking profits.

Warning signs are mounting as I keep mentioning. The market has needed to rest for a while, and more and more indicators are pointing towards the market at least taking some time off. I’m not predicting the market will immediately correct, however a pullback at the very least will happen and take most traders/investors by surprise because of the extreme complacency in the markets.  

Watch the SPX 1345 area, if it holds we should see the SPX make a run for last week’s high of 1355 -1360 area which should end this uptrend.  If in fact the SPX puts in a lower high this will also give a sign the uptrend has ended.

We can see a top is taking shape, you have weakness in the Transports and Russell 2000 which were clear leaders on this grind higher and now weakening,  “Garbage stocks” from 1$ to 5$ are moving to the upside and the Vix which the last couple of days have started to move higher plus extreme over bought readings in our momentum oscillators .

I wish I had more to say, should be an important day tomorrow.  Do the shorts throw in the towel and cover in total frustration? Or do the bulls take some profits heading into the weekend? Hopefully we get some good movement this cant last forever.

The market internals continue to indicate caution.  Bearish rising wedge patterns are ubiquitous across the charts of sectors and indices.   The Dow Transportation index has broken through the lower limit of this pattern, implying a negative move may be upon us.   In addition, benchmarks representing cyclical areas of the economy are showing signs of underperformance against the S&P 500 as the peak to this bearish wedge pattern nears. The waning momentum suggests investors are already starting to book profits before the next market move is realized. The longer the markets grind higher without a pullback the deeper the pullback can be possibly turning into a correction. 

Bottom line is that traders/investors should be prepared for a pullback in the near-term, unless momentum can reinvigorate itself to the upside.   Indices have gone uncorrected for almost two months, representing one of the longest uncorrected runs in the past three years.   A pullback at present levels would re-generate momentum for the spring seasonal rally that typically starts in March.  

The utilities sector was the best performer on the day with the Utilities Sector SPDR ETF posting gains of 0.72%. Other defensive sectors (Staples and Health Care) also ended with positive returns. Cyclical sectors finished the day mixed with Industrials, Financials, and Materials ending in the red. The result caused some indicators of breadth to show losses on the day, the first sign of waning bullish momentum. Defensive stocks have significantly underperformed the market since the year began, but signs of bottoming are becoming apparent as investors prepare to de-risk in anticipation of a correction. The question remains, how steep will that correction be.

The risk-off mentality of investors was also evident amongst the activity of major equity indices. The Dow Jones Industrial Average and the S&P 500, the lower relative risk benchmarks, ended with gains, while the Dow Jones Transportation Average and the Russell 2000 Small Cap index, the higher relative risk benchmarks, finished negative. Looking to the Transportation Average, a very defined rising wedge pattern remains apparent, the lower boundary of which was cracked early in the session on Tuesday. The decline below the lower trendline wasn’t confirmed at the close and therefore not sufficient to declare a breakdown. The pattern has reached a peak and the implication is that as the pattern becomes cornered, the activity becomes trapped and trades lower along the path of least resistance. This will be a leading indicator that warrants watching to determine when a pullback/correction is in play.

For now, buyers continue to buy the dips and any correction from present levels is expected to be shallow, unless something fundamentally changes. The reason for the recent grind higher in equity markets is that bears have shown an extreme lack of conviction to negative bets, unable to gain a foothold to pressure equity markets lower. Short interest has shown significant declines since the year began and the number of investors willing to sell, as opposed to buy, has sunk to complacent levels. The end result is that volumes decline and an unhealthy market is created.   Healthy markets involve a reasonable representation of both buyers and sellers.   This start of year complacent mentality can be fairly typical; it happened last year and finally peaked mid February before coming off. The point is that it does eventually come off and sellers return to the market. Hopefully it doesn’t take a shock to bring sellers back to this market that is my concern.  When markets continue to move showing extreme complacency the pullback becomes more deep and extreme turning it into something more. Use caution and reduce risk for now.

The utilities sector was the best performer on the day with the Utilities Sector SPDR ETF posting gains of 0.72%. Other defensive sectors (Staples and Health Care) also ended with positive returns. Cyclical sectors finished the day mixed with Industrials, Financials, and Materials ending in the red. The result caused some indicators of breadth to show losses on the day, the first sign of waning bullish momentum. Defensive stocks have significantly underperformed the market since the year began, but signs of bottoming are becoming apparent as investors prepare to de-risk in anticipation of a correction. The question remains, how steep will that correction be.

The risk-off mentality of investors was also evident amongst the activity of major equity indices. The Dow Jones Industrial Average and the S&P 500, the lower relative risk benchmarks, ended with gains, while the Dow Jones Transportation Average and the Russell 2000 Small Cap index, the higher relative risk benchmarks, finished negative. Looking to the Transportation Average, a very defined rising wedge pattern remains apparent, the lower boundary of which was cracked early in the session on Tuesday. The decline below the lower trendline wasn’t confirmed at the close and therefore not sufficient to declare a breakdown. The pattern has reached a peak and the implication is that as the pattern becomes cornered, the activity becomes trapped and trades lower along the path of least resistance. This will be a leading indicator that warrants watching to determine when a pullback/correction is in play.

For now, buyers continue to buy the dips and any correction from present levels is expected to be shallow, unless something fundamentally changes. The reason for the recent grind higher in equity markets is that bears have shown an extreme lack of conviction to negative bets, unable to gain a foothold to pressure equity markets lower. Short interest has shown significant declines since the year began and the number of investors willing to sell, as opposed to buy, has sunk to complacent levels. The end result is that volumes decline and an unhealthy market is created.   Healthy markets involve a reasonable representation of both buyers and sellers.   This start of year complacent mentality can be fairly typical; it happened last year and finally peaked mid February before coming off. The point is that it does eventually come off and sellers return to the market. Hopefully it doesn’t take a shock to bring sellers back to this market that is my concern.  When markets continue to move showing extreme complacency the pullback becomes more deep and extreme turning it into something more. Use caution and reduce risk for now.