This is an annual view of the market internals. It is a fiscal year chart running from Oct 1 through Sept 30. It measures the change per day of the 24 day moving average in Issues and Volume on the NYSE. Because of the excel set-up it presents itself in a backward fashion, with the most current point on the left side of the chart. Each Oct 1 the chart resets to zero so you get a discreeet annual look at what is going on and the ability to compare years. The downturn that is starting to show now should not be ignored.
There are times when there is a tale of two markets. Now may be one of those times. If we look at the past ten days of stock trading on the NYSE versus the point change in the DJIA for this period, we see an outlier event. Breaking the ten days into two groups of five days, the first being the back-end five days and the other being the front-end five days, we see a complete disconnect of internal stories between the periods. For the back-end five days, the DJIA rose 263 points with 153 net advancing stocks on net advancing volume of 51 billion shares. Sounds impressive until you compare it to the front-end five days. For the most recent five days, the DJIA declined 247 points, roughly offestting the back-end point gain. This is where the stories now diverge in a meaningful way. The number of net declining stocks for the front-end period was 4,084 companies on net declining volume of 1.2 trillion shares. Compare those internal statistics for a moment. It does seem the internal voting machine is heavily pointing toward the exits, even if the Index point change is lagging behind. Invest wisely……..
Every month I document a list of the top 25 equities that my financial models indicate are the most attractive among a portfolio of 187 companies. The June list reflects 17 equities with price gains and 8 with price declines for the period June 30, 2017 through August 7, 2017. The top double digit gainers are Diamond Offshore +12.7%, Orbotech Ltd +11.0%, Lam Research +10.2%, Apple +10.1%, and Netgear +10.0%. The largest double digit decliners are Viacom Class B shares at a minus 20.4%, Mylan -17.6%, and Southwest Airlines -10.9%.
As of this past week, two of the June Top 25 selections have come off the list and have been replaced by two new addtions. Of the remaining 23 companies, 14 companies have moved up or down on the list’s rankings. Lam Research is now number one, displacing Diamond Offshore which fell out of the top 25 after its recent increase in price.
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|Fundamentally, the equity market remains at a level that is historically over-valued. In each prior monthly newsletter, I have written at length about the extended levels of the key fundamental metrics which cause me to believe that we are at a high-risk level for a market correction. In this month’s newsletter, I will focus entirely on the technical measures of the equity market to help assess where we may be in terms of the timing of a stock market correction.
The summary view is that there are two dominant themes evident from the technical data:
1. Many technical indicators are at peak levels that have historically preceded a stock market downturn, and
2. Other indicators have already made the turn lower, indicating a near-term decline has a greater probability than has been the case in a very long time.
After you read and digest this newsletter, please feel free to email me with any questions you may have. The array of technical information may be a bit “wonky” and challenging to understand, so I have included charts to help sort through the numbers that are contained in the paragraphs.
My overall view is that equities are priced at levels that are not supported by the fundamentals. This valuation disconnect has not mattered during the past eighteen months, and the technical side has supported the rise in the equity indexes. Absent signs of fatigue in the technical indicators, or signs of actual underlying weakness within the many key technical variables, the market risk of a decline has been muted. That fact is changing, and the array of information set out below should be clear in providing the signs that the tide is turning and that the recent alignment of market fundamentals and market technical indicators are exposing a great level of risk that a material decline in market prices is not far off.
With this preamble, I wish you all well and prescribe a heavy dose of coffee.