New Highs But Weak Breadth – Another Down-leg Before Rally Resumes?

Last week and early this week, some of the headline indices made new highs, which was very well received by financial media. Is the correction already over is it time to become bullish again? We do not think so. Not yet.

Out of the 10 indices we are following regularly, 6 made new highs (Dow Jones Industrial, S&P 500, S&P 100, Nasdaq 100, Semiconductors and NYSE Composite). The Dow Jones Transport, Russell 2000, S&P Mid-Caps and S&P Small Caps are still trading below their all-time highs. Especially the fact that transport stocks have not yet confirmed the breakout in industrials raises the question if last week’s breakout is sustainable.

Signals that the breakout might be a bull-trap is coming from market breadth indicators. For example the number of stocks making a new 52-week high is lower than it was in August (with the exception of the S&P 500). Also the percentage of stocks trading above the 200-day moving average is lower than in August. Such non-confirmations often signal that the market is not as healthy as it should be during a breakout campaign. On the daily charts, we are also seeing non-confirmation in momentum indicators, such as the RSI.

Therefore, we continue to warn of chasing the market and instead expecting one more down-leg to complete an a-b-c correction. Remember, we are in the middle of a historically very week period (September/October). Nevertheless we expect the correction to be rather shallow. In the case of the S&P 500, the lows from August around 2420 should provide good support. Once this correction is over, we still expect the market to start its final fifth wave to the upside that could last into early 2018 and reach 2’550, our long-term target for the 2009 bull market.

Only a broader based breakout accompanied by a strong improvement in market breadth would make us change our view.

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