NYSE BULLISH PERCENT INDEX FALLS BACK BELOW 50 -- NYSE ADVANCE-DECLINE MEASURES WEAKEN AS WELL -- WEEKLY MACD LINES TURN NEGATIVE -- YEN RALLY THREATENS CARRY TRADE -- HOW TO USE PARABOLIC SAR TO PROTECT GOLD PROFITS

NYSE BULLISH PERCENT INDEX FALLS BELOW 50 ... On Wednesday, Arthur Hill wrote about the negative divergence between a rising Nasdaq market and a falling Nasdaq Bullish Percent Index with bearish implications for that market. Today, I'm applying the same analysis to the NYSE. Unfortunately, the message is similarly troubling. Chart 1 compares the NYSE Bullish Percent Index (BPNYA) to the NYSE Composite Index (green line) over the last year. [The Bullish Percent Index is the percent of stocks in an index that are in point & figure uptrends]. Notice the divergence between the two lines during October. Although the NYSE moved to a new record high during October, the BPNYA rose to only 65 before falling back below 50 this week. In addition to forming a "negative divergence", a reading below 50 means that less that half of the stocks on the big board are in uptrends. That's hardly a recipe for an ongoing bull market. Chart 2 compares the two lines over the last four years. There have been four instances prior to 2007 when the BPNYA dipped near the 50 level which often happens during a market correction. In all four instances, however, the line rose back over 70 (which is where markets often peak). In no prior instance did the BPNYA fall back below 50 within a month of bottoming. This is the first time that's happened since the bull market started more than four years ago.

Chart 1

Chart 2

ADVANCE-DECLINE MEASURES WEAKEN... On October 9, I warned that a negative divergence existed between a NYSE Composite Index (green line) at a record high and the NYSE Advance-Decline line (NYAD) well below its summer high. That situation has grown even weaker since then. Chart 3 shows the NYAD forming a second "divergence" in late October (see arrow) before falling to a two-month low. [I also explained that most of that breadth weakness was occurring in financials, consumer discretionary, small caps, and transportation stocks]. Chart 4 shows similar deterioration in the NYSE Summation Index (NYSI). [Please see October 19 message for an explanation of that indicator]. The NYSI is a longer-range version of the McClellan Oscillator which turned negative in mid-October. I explained that a negative McClellan Oscillator caused the NYSE to turn down as well and threatened to push it back below the zero line. Chart 4 shows that the Summation Index is now in minus territory. Again, not a good sign in a bull market.

Chart 3

Chart 4

WEEKLY MACD LINES TURN DOWN ... The October 9 Market Message also contained a discussion of the bullish crossing in the weekly MACD lines for the S&P 500. Under the headline "Possible Divergence on MACD Lines," that earlier article warned that the bullish crossing of those two lines still left them well below their summer highs. That created a possible negative divergence and warned "that makes this potentially the weakest intermediate buy signal over the last two years". That warning took on more relevance this week when the weekly MACD lines turned negative once again. All of these negative divergences are warnings that the recent market rally has been on weak technical footing, and leaves the market vulnerable to more downside surprises.

Chart 5

JAPANESE YEN RISES TO 52-WEEK HIGH ... Another problem that may confront global markets is the recent jump in the Japanese yen. Chart 6 shows the yen climbing more than one percent against the dollar and trading over 90 for the first time in more than a year. During the summer, the yen rise above a two and half year down trendline. That sure looks like a new uptrend developing in the Japanese currency. Problem is a rising yen threatens the "carry trade" on which much of the global rally has depended. Traders have borrowed low-yielding yen and invested in higher yielding currencies and assets. Every yen rally over the last two years (including this summer) has coincided with a market correction as traded have been forced to reverse carry trades. Those previous yen rallies, however, were within a well-defined downtrend. Not anymore.

Chart 6

STAY DEFENSIVE ... Over the past few weeks, I've been advising rotating into Treasury bonds and more defensive stock groups like consumer staples, healthcare, and utilities. I also recommended technology stocks. After this week's tumble, however, I'm removing technology from our "safe haven" list. Although energy and precious metals remain in uptrends, I'd advise against new positions at these extended levels. That's especially true with gold nearing $850 and oil $100. Foreign markets continue to hold up better than U.S. stocks. Chart 9 shows the EAFE iShares still trading over their mid-October low and their 50-day moving averge. Chart 10 shows Emerging Market iShares doing the same. I'd be prepared, however, to take some profits in any market that closes below its 50-day moving average.

Chart 7

Chart 8

USING SAR TO PROTECT GOLD PROFITS ... Sometimes moving average lines are too far below the current price to be of much help in protecting against a market downturn. That's the case with gold right now. In situations when a market has had a strong run, there's another indicator that's often more helpful in protecting existing profits. It's called SAR, or Stop and Reversal. These stopout points tend to hug the price action more closely and give earlier exit signals. Chart 11 is an example of that happening in the spring of 2006 when I last used this indicator on gold. Notice the rising SAR dots below the price bars from late March 2006 to mid-May. A stopout sell signal isn't given until one of the lower dots is hit. That happened in mid-May 2006 when gold peaked. This is a very sensitive indicator and only works in steep uptrends. Like now. Chart 12 shows the current trend of the streetTracks Gold Trust (GLD). The rising dots have been on a short-term buy for 23 trading days. The GLD would have to drop to the last dot at 80.15 to trigger a short-term sell. The SAR values rise with daily price rises. You can track the indicator by clicking on Parabolic SAR under the Overlays menu. Remember that this is a "short-term" indicator. It's not helpful for longer-term investing. It is helpful for those who want to ride the gold trend, but take "some" money off the table on the first signs of a downside correction.

Chart 9

Chart 10

DOW CLOSES BELOW 200-DAY AVERAGE... The market had the worst week since the latest rally started in mid-August. One of the reasons was the steep drop in the technology-dominated Nasdaq market. Chart 11 shows the Nasdaq Composite breaking initial support at 2700 and bearing down on its 200-day line (and on heavy volume). Chart 12 shows the Dow closing below its 200-day line for the first time in more than a year. [The S&P 500 also ended below its 200-day line]. All of these technical breakdowns justify a more defensive market approach.

Chart 11

Chart 12

OFF TO EUROPE... With the dollar at an all-time low against the Euro, I can't think of a worse time to travel to Europe. But go I must next week. In my absence, Arthur Hill will do his usual fine job of keeping you posted on market trends. I hope today's Market Message has spelled out my market views along with some ideas of how to weather current market weakness. I haven't mentioned bear funds. But those of you familiar with those vehicles might want to consider using one of them to hedge against more serious market losses. Chart 13 shows the Short S&P 500 ProShares Fund (SH) trading at a two-month high today. [It's a mirror image of the S&P 500]. Keep in mind, however, that short funds are trading vehicles and not long-term holdings.

Chart 13