THE NUMBER OF NYSE NEW HIGHS ISN'T EXPANDING WITH PRICE HIGHS -- BOLLINGER BANDS ALSO SHOW THE MARKET DANGEROUSLY STRETCHED TO THE UPSIDE -- DESPITE OVERBOUGHT READINGS, NO SELL SIGNALS HAVE BEEN GIVEN

NEW HIGHS ARE SHRINKING ... Virtually every short-term indicator that we have show the market to be in an overbought condition. Some are starting to show short-term divergences. One example of the latter is the NYSE New Highs-New Lows Index ($NYHL). That's the red line line in Chart 1. That line measures the difference between the number of NYSE stocks hitting new 52-week highs minus those hitting 52-week lows. The line should rise during a market uptrend. And it has. The problem is that the NYHL hasn't kept pace with the S&P 500 (green line). As of today, the net difference of 300 is well below the April peak at 400. It's also below last year's highs that exceeded 400. Usually that type of negative divergence between the two lines leads to some type of market pullback. The last one was in February (see arrow).

Chart 1

A LONGER LOOK AT THE NYHL LINE... Chart 2 compares the S&P 500 (green line) to a five-day moving average of the NYHL line (red line). [The moving average smooths out the latter]. The chart goes back two years. Drops in the red line usually coincide with (or lead) pullbacks in the market. The divergence between the two lines this year is similar to what we saw this time last year. The red (NYHL) line dropped from January to May of last year as prices rose. The result was an 8% market correction. There's no guarantee the same will happen again. The negative divergence between the two lines in 2007, however, does argue for some caution at current levels. That's especially true considering the market's history of underperforming in the months between May and October.

Chart 2

OVERBOUGHT BUT STILL TRENDING HIGHER ... There's good and bad news on Chart 3. The good news is that the S&P 500 continues to trend higher with no convincing signs of a top. The bad news is that the 9-day RSI line is in overbought territory over 70 and is showing some minor negative divergence. This is the first negative divergence seen on the RSI since the last rally started in March. To signal a short-term top, however, several things have to happen. First, the RSI has to fall below its late April low. Second, the 20-day moving average (green line) needs to be broken. Thirdly, the daily MACD lines need to turn down. So far, none of those things have happened. Any one of the three indicators cited could signal a market pullback or consolidation. About all we can say with some certainty is that the market is stretched unusually far at this point.

Chart 3

STRETCHING THE BANDS ... The purpose of Chart 4 is to show how stretched the market is at the moment. The upper and lower blue lines are Bollinger Bands applied to daily S&P 500 chart. However, I'm using a 100-day moving average in place of the more standard 20-day span. [The 100-day average is adapted from the 20-week moving average which is more helpful in spotting intermediate term overbought conditions]. Notice that the SPX is trading above the 100-day upper band. That's a little unusual. A look back in history shows that a market index doesn't usually stay over that upper band for too long. The black line on the top of Chart 4 (%B) measures the distance above and below the moving average (dashed line). The %B is helpful is spotting overbought and oversold situations. Notice that the %B has reached the same overbought level that it did last October. The market kept climbing for a few months after that, but that's not the typical pattern.

Chart 4

A LONGER TERM LOOK ... Chart 5 applies the same 20-week (100-day) Bollinger Bands to the s&P 500 over the last three years. The chart shows shows how unusual it is for the S&P to stay over that upper band. Moves over the upper band are usually followed by a pullback or consolidation. The %B indicator on the top of Chart 5 is used like an overbought/oversold oscillator. The overbought level begins at the 1.00 level (red horizontal line). The %B has reached that level four previous times since 2004. Each one has let to some type of market pullback (see lines) although the 2006 signal proved to be early. All that tells us is that this market rally is dangerously stretched to the upside. This market rally may be different, but it's usually not a good idea to bet on that.

Chart 5