Short-term Outlook:  25% Bearish  From Feb 17, 1097 SPX

Equity Indicators - Updates and Extremes

Percentage Of S&P 500 Stocks Above Moving Averages

A notable aspect about the rally over the past few days is that although volume has been conspicuously low, breadth has been good.  We've seen a lot of stocks rise along with the major market averages.

That has put a couple of breadth measures for the S&P 500 into an unusual position.  The rally has been quick enough that now more than 90% of component stocks are trading above their 10-day moving average, which is the highest amount since November.

But the January decline was severe enough that even the recent rally hasn't been enough to move much more than 50% of S&P components above their longer-term 50-day moving average.

These stark differences can sometimes lead to predictable behavior, so let's go back to 1998 (the earliest for which I have this data) and look for any other time this setup triggered, along with the S&P's performance going forward.

 

S&P 500 Performance After > 90% Of Stocks Are Above 10-Day Avg and <=50% Are Above 50-Day Avg
Date	% Above 10-Day	% Above 50-Day	1 Day Later	1 Week Later	2 Weeks Later	1 Month Later	3 Months Later
10/15/02	91	47	-2.4%	1.0%	0.1%	0.1%	4.2%
03/17/03	91	47	0.4%	0.2%	-1.7%	3.3%	17.2%
12/06/07	91	47	-0.2%	-1.3%	-3.1%	-7.8%	-15.5%
02/01/08	93	43	-1.0%	-4.6%	-3.3%	-4.9%	1.3%
11/04/08	95	14	-5.3%	-10.6%	-14.6%	-16.0%	-15.9%
11/28/08	92	20	-8.9%	-2.3%	-1.8%	-0.6%	-22.3%
03/13/09	95	22	-0.4%	1.6%	7.9%	11.2%	25.1%
Average			-2.5%	-2.3%	-2.4%	-2.1%	-0.9%

The results were fairly consistent in that weakness prevailed short-term, with the one notable exception being the last occurrence just off the March 2009 bottom, when, other than one small day of rest, the S&P managed to climb steadily higher.

That was the only instance out of the seven where the overbought 10-day average hoisted the 50-day average up along with it.  After the others, it was the 10-day average that gravitated back down towards the 50-day as the market took a breather.  In a couple of other cases (October 2002 and March 2003), the rest was just a quick respite or months-long trading range, while the others (during the bear market) were much more severe.

Even if we are in the beginning stages of yet another intermediate-term ramp higher, it looks like we may have already hit the "too much, too soon" area where markets tend to take a step or two backwards before another thrust.

Japanese Margin Traders

Sometimes we get a reading in an indicator that just doesn't make a lot of sense.  And while it may be a notable extreme, it's so unusual that it could just as well be a data error.

That's the case this week with the profit/loss of Japanese traders on margin.  Last week, they showed an exceptionally large net loss on shares bought with leverage.  The only comparable readings were back in the fall of 2008, which made a lot more sense at the time.

The trades are calculated in Yen, but there weren't any outsized currency moves that could justify such an outlier in this data.  In the past, when we've seen such large losses among these traders, it has usually coincided with at least a bounce in US markets.  Because of how unusual this one is without a probable explanation, however, I'm not considering it that much of a positive.