The observations I have shared over the past number of months in regard to the market, which have pointed to an over-valued condition in a supportive technical environment, are unchanged this week. So, rather then write (while I am on vacation) on the subjects I typically cover each week, I thought it appropriate to share my views on momentum and where the market is presently. The headline observation is that momentum is close to or has peaked. Using history as a guide, momentum indicators say it is time to limit exposure from long positions.
Consider the following:
1) New York Stock Exchange Volume: One of the calculations I perform each week is to compute the five day average of volume on the NYSE. I then compare the current five day period to the prior five day period and take the difference. On a running basis this difference is summed to develop a picture of net volume change over time. This is contrasted with the net point change over time in the stock indexes. The momentum change here is significant as since February 12, 2016 the DJIA has risen by roughly 2,500 points, but the cumulative volume change has lost momentum going from a net positive volume change of 850 million shares to only 115 million positive shares today. The percentage of day-to-day advancing volume and issues over declining volume and issues are supportive of an advancing market, but the decline in overall volume participating in the market points to a market that is losing steam, losing momentum. The decline in net cumulative volume noted above may be criticized in an off-handed manner as not addressing seasonality, but the truth is that last year at this time we were net positive over 900 million shares, so the summer is not the driving force here. It is simply a decline in overall demand that is occurring under the surface.
2) Relative Strength momentum as pictured through variance from the mean (Standard Deviation) is in the tail portion of the curve for both RS moves higher and for RS moves lower. The measures here compute the cumulative DJIA point moves higher for each week in a twelve week period, and separately computes the cumulative DJIA point moves lower for each week in the same twelve week period. This data has been tracked going back to the year 2010. The up move benchmark is 231 points whereas the current SD up measure is at 316 points, indicating we are in the upward end of the tail that will bring about a reversal or a decline to enable a reversion to the mean. For the RS down measure the benchmark is 345 points whereas the current SD down measure is at 166 points, indicating this too is in the tail, but in the low tail end that will bring about a reversal or a surge in downward points to enable a reversion to the mean here.
3) Lastly, the data above is put in context by using an oscillator of Relative Strength. This view is to determine inflection points and to give some sense of timing of when a reversal move may take place. It does not measure the size of the move, only the potential timing and the direction of the move. Over time the RS down oscillator has indicated a turning point lower for the market when the Oscillator reaches a negative 150 point reading. We are presently at negative 145 points. The range of the oscillator over the past ten years for downward Relative Strength is positive 5 and negative 150. At a negative 150, the market has consistently over time reversed its move higher and headed lower within the next one to four weeks. For the upward RS Oscillator, the peak point is positive 50 points, which when reached typically signals a market top is near. The RS Up oscillator hit positive 50 points two weeks ago.
I share the above with you to simply change the focus. It is clear to me that we are fundamentally over-valued to the point of extremes that are setting risk records in my models. That tells me that when we do get a correction lower, it is likely to be very large and steep for we are at stock market levels that have not been historically sustainable, particularly in an economic growth environment that is modest at best. Coupling this extended market condition with the momentum indicators above simply makes me more and more cautious.
As always, be careful out there and have a great week.