Bad Breadth Signals Drop In Stocks

Last week we highlighted a negative change in our short to medium term perspective discussing the earnings momentum shift that historically coincides with significant stock market corrections. Today we are including charts with a shorter perspective that we were looking at last week that add weight to the current downside reversal that is part of a larger 2 month trading range in the general stock market. The Advance/Decline Ratio Oscillator (ADRO) courtesy of as we have shown before measures breadth using advancing and declining stock prices measuring their trend and momentum relationship. 

Advance Decline Ratio Oscillator 1-15

Below is a chart of the S&P 500 Index March Futures showing the recent Buy and Sell indications basis the ADRO illustrated above. ADRO may miss an opportunity for a Buy or Sell such as the late December top in stocks, but when it triggers a signal it tends to demonstrate a very accurate track record.

advance decline SP

Including the current correction underway today the average stock price is still down only 3% from the recent record high 4 weeks ago. We remain 90% investment in our stock market exposure. Today the “excuse” for lower stock prices are centered around the earnings of Caterpillar and Microsoft. We warned of earnings last week and in reality the earnings momentum picture has been painted poorly for several months with the market starting to take notice today.  The graph below reveals that durable goods orders have been weak for the past 5 months even without the abnormal July spike in aircraft orders. Once the energy decline subsides for a couple quarters and the global economy turns up, we wouldn’t be surprised to see aircraft orders help boost new durable goods orders once again.

Durable Goods Overview

The ingredients are there for a very rosy global economic backdrop with record low cost of credit and debt to service ratios, pent up demand as well as a renewed unlimited monetary stimulus using Quantitative Easing (QE) in every Industrialized 1st world country on the planet other than China. A robust global expansion appears to be on the horizon. Some of this good news is discounted but outweighed by the near term concerns of slower earnings, energy default contagion and an overdue increase in volatility as the market becomes aware of the deflationary reason interest rates are declining to new record lows this month. Once the markets feel the energy collapse has bottomed and that the Global Central Banks can backstop all losses, then stock prices will return to a steeper trend of appreciation. We have been negative on Oil and the energy sector for over a year now, but continue to expect signs of an Oil bottom by March which will likely coincide with a bottom in stocks.

Consumer Confidence 1-15


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