A potentially significant warning sign

The chart above is a weekly snapshot going back to before the 2008 financial crisis. The green line is the upper band of the DJIA measured over a 16 week period. The red line is the lower band. The yellow line is the weekly close of the DJIA.

Looking at the green line during the collapse of the equity markets in 2008/09, the market moved significantly below the upper band in a manner that was unique. When the market hit bottom and started to reverse to the upside, it proved its bottoming was complete when the upper band was forced to move dramatically lower to meet the weekly closing index. That was an incredibly important buy signal.

Since then, the upper band has tracked closely to the DJIA weekly closes.

Since 2009, the lower band has at times shown gaps away from the Index, gaps that were ultimately closed by downward corrections in the index (see the red line gaps from the Index and the trigger points that caused the lower band to move up to meet the weekly close). Now focus on the most recent data. Starting 40 weeks ago the lower band and the index began to separate once again. This time the separation spread continued to widen beyond what historically would indicate a small correction was due. If you look at the most current point, the spread is roughy equivalent to the spread that existed in 2009 when the market finally reversed to the upside (4,000 vs 4,500 point spreads). Additonally, the magnitude of the spread for both periods are outliers, and in 2008/09 it preceded the bottom. This inidcator tells me we are close to a top and a sustained move lower, a move that will not be a typical correction in size, but will reflect a bear market.

The Connolly Financial Advisors Monthly Economic & Market Report

Equity prices have led economics and it is catch-up time, but what if the economy does not show up?  Have the volume of shares bought in rising stocks proven to be the right backdrop for continued confidence in more equity gains?  What risk premiums would you attach to this market?  Cash, Gold and Crypto-Currencies have been winners this summer, but will that continue?   Is it time to batten down the hatches as the horizon shows greater instability with each passing day?

Executive Summary

The year 2017 has seen the DJIA rise by 2,200 points through August 31, 2017.  An impressive positive performance.  With this magnitude of a gain, over 11%, would you expect the volume of activity in 2017 to confirm the gain by also showing higher volumes and much greater positive volumes, indicating broad participation and engagement in the market?  I would want to see that.  If we look at the same period in 2016, the DJIA index rose by 1,067 points, roughly half of what we have gained in the YTD 2017 period.  Now I really expect the 2017 data to be much better than 2016, given the greater Index gains.

What does the activity on the NYSE reveal?

Shares traded by month on the NYSE for 2016 and 2017 (in billions of shares):

It is surprising that in every month the volume of shares traded during 2017 are below the monthly shares traded in 2016.
What about the composition of the shares traded?  I would expect that the net volume in stocks that advanced in price for 2017 would be much higher than the net volume in 2016.  If this is the case it would make me less concerned about the overall volume decline that we see above.  So what happened?  In the YTD period through August 2017, advancing volume exceeded declining volume by 2.15 trillion shares.  In the YTD period through August 2016, advancing volume exceeded declining volume by 7.5 trillion shares.   WOW!  There is a disconnect here that is astounding to me.

What happens if we move away from stub periods that are less than 12 months in length, and look at the comparisons between years using the fiscal years September through October, from 2011/12 through where we are in 2017, with one month left to go in the fiscal year.  Will that help alleviate the concern that the one-off comparison above revealed?  Let’s see.

It is clear from the above that the current activity in 2016/17 is an anomaly.  The volume of net advancing shares per point change in the DJIA Index is significantly below the historic average, and indicates the weakness of money flows into advancing stocks overall during the current period.  This is of great concern to me and casts significant doubt as to the equity market’s support for current prices.

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