On the one hand... - ValueTrend

Today’s chart is that of the broad based New York Stock Exchange Average. While it’s true that the S&P 500 represents a big chunk of trading that occurs on the NYSE – the broad index average gives us the larger picture. As such, it can be another “breadth” indicator of sorts—showing us participation in a broader array of stocks.

The NYA is the candlestick graph, while the S&P 500 is shown as a solid thick black line graph. What I want you to note here is the more or less break even situation by the NYA a couple of weeks ago vs. its old highs last seen in 2015. For comparison, I drew a horizontal line from the same point on the S&P 500. You can see that the S&P500 (black line) went on to considerably higher levels, while the NYA did not. This, from the perspective of market breadth (i.e. broad participation from many differing issues) is a bit of a non-confirmation. Less stocks are participating in the upside than one might think. While it is true that we really need to focus on the stocks most widely held – with less concern for the thinner, lesser traded stocks – it’s still something to take into consideration when viewing the health of the market. Generally speaking, the market is looking good—but there are signs of a bit of concentration in the better known names – hence the much greater upside in the S&P 500. Too much concentration in leadership can lead into overvaluation in those issues.

Statistical bearishness abounds

Another observation that might be of interest to readers is a statistical study by sentimentrader.com. They note a weaker historical price pattern for the S&P 500 when a failed breakout – as noted on my last blog – occurs. If the market has gone to new highs and stayed there for 3-7 days, then failed – the market tends to experience a 1% average (mean) decline over the following 30 days. This study has shown a 96% relevance (accuracy) on all such occurrences since 1955. Further, the S&P 500 tends to have an average decline of 4.2% in February following the election of a new US President – something I have been harping on through this blog (see my “Sell the inauguration” blog in mid-January). Finally, the month of February tends to be a choppy one – election or not- in most years. This, according to Thackray’s Guides and Equityclock. So there are some points against the markets right now.

The bright side

On the positive side – sentimentrader also notes that markets are – on average (mean return) 1.8% higher a month later after a new high is set in January. So, there’s that…

My two cents worth: but pay me later…

My take is that February may indeed prove to be typical of its seasonal patterns, given the focused concentration (and potential overvaluation) of the blue chips. Given the negatives within the price patterns noted above, I am happy to hold my cash a little longer. I expect to deploy it before month end.

Keith on BNN “MarketCall Tonight” Next Monday Feb 6^th at 6:00PM