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Stock Market Suffering From Severe Case Of Halitosis

By Dr. Arnout ter Schure Stock MarketsJul 09, 2021 05:08PM ET
www.investing.com/analysis/stock-market-suffering-from-severe-case-of-halitosis-200590722
Stock Market Suffering From Severe Case Of Halitosis
By Dr. Arnout ter Schure   |  Jul 09, 2021 05:08PM ET
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Haliwhat? Halitosis: an oral health problem where the main symptom is bad (smelling) breath.

Since the stock market is an index made up of individual stocks (about 500 for the S&P 500 and 30 for the Dow Jones Industrial Average), Halitosis means fewer and fewer stocks in each index are participating in the rally.

This often happens in the latter stages of a rally. This rally is then easily susceptible to selling pressure. The last stages of a rally are in Elliott Wave Principle (EWP) terms called 5th waves. Thus, let us have a look at some market breadth indicators. Please note that lousy breadth, aka negatively diverging breadth, can help foretell a pending correction, but it does not tell us how significant that correction will be.

Figure 1: Percent of stocks in the S&P 500 above their respective 50-day Simple Moving Average

Percent of stocks in the S&P 500 above their respective 50 DSA.
Percent of stocks in the S&P 500 above their respective 50 DSA.

The number of stocks in the S&P 500 trading above their own 50-day SMA has steadily declined since late March, while the index kept rising. Only 44% of all the 500 individual stocks in the S&P 500 are trading above their 50-d SMA, while the index hit a new all-time high yesterday. One of the most significant divergences over the last two years. The chart shows the varying decrease of correction that followed: anywhere from 5% to 35%.

Figure 2: NYSE Common Stock Only Cumulative Advancing/Declining line

NYSE Common Stock Only Cumulative Advancing/Declining line.
NYSE Common Stock Only Cumulative Advancing/Declining line.

The Cumulative Advancing/Declining (A/D) Line can also help assess if a correction is pending by showing negative divergence. See Figure 2 above.

Starting on the left-hand side of the chart (pink dotted arrows), negative divergence is not even needed to usher in a 10-20% correction. Then, in February 2020 (solid red arrow), the 35% COVDI-19 crash was foretold. Similarly, for the September 2020 correction, which was “only” 11% (second solid red arrow). Currently, the A/D line is negatively diverging once again (red dotted arrows on the right-hand side of the chart) and, thus, a 10-35% correction should be expected.

Figure 3: Bullish Percent Index Charts for S&P 500 and NASDAQ

Bullish Percent Index Charts for the S&P 500 and NASDAQ.
Bullish Percent Index Charts for the S&P 500 and NASDAQ.

Thirdly, the Bullish Percent Index (BPI) measures how many individual stocks in an index are on a Point & Figure Buy Signal (Source: here). Also, now it follows fewer and fewer individual stocks in both the S&P 500 and the NASDAQ Composite were on a “buy,” while both indexes moved higher. The arrows in both charts show prior similar diverging instances, how long they can take, and what effect they ultimately had on the underlying indexes. Corrections varied from anywhere between 5-35%.

Figure 4: Summation Indexes for the S&P 500 and NASDAQ 100

Summation Indexes For S&P 500 And NASDAQ 100
Summation Indexes For S&P 500 And NASDAQ 100

Lastly, the McClellan Summation Indexes (SIs) for the S&P 500 and Nasdaq 100. SI’s add daily McClellan Oscillator (MO) readings to the previous day. Source: here.

Negative MOs mean there were more declining than advancing stocks that day, causing the SI to decrease, whereas positive MOs mean the reverse. Thus, since May, the S&P 500 has mostly seen negative MOs and a declining SI, while the NDX mostly had positive MOs and a rising SI. Talk about bifurcation and not making the life of a market analyst any easier. This shows that the market-cap-weighted indexes like these two were pushed higher by technology-related stocks and predominantly a select group of mega-cap stocks like Facebook Inc (NASDAQ:FB), Apple Inc (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL).

Although there are many more market breadth indicators, I do not want to succumb to “analyses paralyzes.” These select indicators all show that several indexes indeed suffer from Halitosis, which always lead to a correction further down the road. The question now is: “How much of a correction will we get?”

Given my preferred EWP count (see my recent article here), I don’t expect a 35% correction, but anything in between 5% and 10% will suffice to reset the clock before the next rally can start.

Stock Market Suffering From Severe Case Of Halitosis
 

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Stock Market Suffering From Severe Case Of Halitosis

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Comments (11)
Jeff Page
Jeff Page Jul 11, 2021 2:28PM ET
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Thank you for validating my peer behind the curtain. I posted on FB 05/05/21. I also posted on 03/23/20 that sellers were exhausted and to jump in with both feet. I'd like to see this with the VIX included and what it's telling us.
Naveed Mushtaq
Naveed Mushtaq Jul 10, 2021 3:45PM ET
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@Dr ArnoutHats Off to you sir, for categorically adressing each commentGreat article and inline with your earlier pieceYour previous insight has helped me claw back some of the money i lost during last years volatilityThanks and keep up the good work
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 10, 2021 3:45PM ET
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You are so very welcome
Andrew Bevan
Andrew Bevan Jul 10, 2021 11:19AM ET
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The rotation into Big-Cap is typical in the final stages of a long term Bull-campaign, together with increased volatility. It's investors searching for security. Also, the several indices tend to peak at about the same time, while bottoms spread out. So the high is closing in. Trouble is, we don't know whether i.e. NSQ100 is running to 14860, 15054 or 16000 (Schure targets).
Jouni Matero
Jouni Jul 10, 2021 11:19AM ET
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My guess is we will go a bit over 15k until this escalates, just like China's RRR situation yesterday gives a strong sign things are getting worse faster and faster. I predict next weeks earnings will be mostly full of disappointments except big tech might meet the extended expectations, after next week we might start see signs of snowball effect downwards.
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 10, 2021 11:19AM ET
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Agree and well said!
Jeff Page
Jeff Page Jul 10, 2021 11:19AM ET
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my expectations are for the banks to come in above numbers and then fade. Citi is the only one I don't care for in the group. We'll see if my XLF $36.50 calls (expiry 07/23/21) hold up. Currently negative in this position.
prashant sharma
prashant sharma Jul 10, 2021 7:46AM ET
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rising inflation will stop that easy money to come in the mkts in near future, and the article doesn't mean the correction will start immediately, it means be cautious thn complescent!
jason xx
jason xx Jul 10, 2021 7:25AM ET
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I might be wrong as I am new but does this article contradict the linked article or do they align? I read both but not sure if they are along the same lines?   https://www.investing.com/analysis/nasdaq-100-has-turned-around-and-should-be-heading-for-16000-200589142
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 10, 2021 7:25AM ET
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No it does not contradict. All breadt charts i shared show “bad breadth” can continue for a long time before it matters. Clearly all charts show how markets can continue to rise despite. This is simply a look under the hood. There is smoke coming from under the hood, but the car is still driving.
jason xx
jason xx Jul 10, 2021 7:07AM ET
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If it was this easy to time the market we would all be rich. There's record inflows coming in every week from retail and they dont give a SHT about indicators.
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 10, 2021 7:07AM ET
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My article actually shows understanding the market and what is next is quite the opposite of being easy.
jason xx
jason xx Jul 10, 2021 7:02AM ET
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The question is when will the correction happen? This week while im hedged against it or 4 weeks from now while i'm on sidelines losing out on new all time highs and to late to buy back into positions?
Fin Tecker
Fin Tecker Jul 10, 2021 2:40AM ET
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A pending correction is obvious. another bear market within 2 years is rather unprobable . For traders your article did not answer the crucial question about timing.
Jouni Matero
Jouni Jul 10, 2021 2:40AM ET
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2 years? I'm pretty sure you don't have to wait next year for this to escalate big time.
elliot trach
elliot trach Jul 09, 2021 11:11PM ET
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Selection: His indicators went down many times & the stock index did not fall, kept on up...so?
BISWA PANDA
BISWA PANDA Jul 09, 2021 10:10PM ET
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Interesting article. Very logical.
Leon Kelly
Leon Kelly Jul 09, 2021 6:24PM ET
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I agree with you about people ignoring the technicals. But if Nancy pelosi husband is buying leaps in tech right now how can you not follow the "Smart money"?
Todd Gray
Todd Gray Jul 09, 2021 6:24PM ET
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if I were that guy, I'd hedge equal to, or maybe larger than the long position. profit on the way down, should that occur. I read many months ago many big funds are deep in put contracts.
Todd Gray
Todd Gray Jul 09, 2021 6:24PM ET
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on the other hand, it could melt up for a year or two. idk.
jason xx
jason xx Jul 09, 2021 6:24PM ET
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What is he buying and how do you know its not just typical made up republican propaganda? Got a source? Is it AMZN?
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 09, 2021 6:24PM ET
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jason xx they have to disclose all their (insider) trading: https://disclosures-clerk.house.gov/public_disc/ptr-pdfs/2021/20019004.pdf
Dr. Arnout ter Schure
Dr. Arnout ter Schure Jul 09, 2021 6:24PM ET
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Thanks but i never said people were ignorinf technicals, neither do i see the relevance of my article to Pelosi…
 
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