STOCKS BOUNCE ON HOPE FOR GREEK COMPROMISE -- LONGER RANGE INDICATORS, HOWEVER, SHOW NEGATIVE DIVERGENCES AND SUGGEST DETERIORATION BENEATH THE SURFACE -- DOW WEEKLY AND MONTHLY MACD LINES ARE NEGATIVE -- LESS THAN HALF OF NYSE STOCKS ARE IN UPTRENDS
DOW JONES COMPOSITE AVERAGE HITS NEW LOW... I don't know about you, but I'm tired of hearing about Greece. It makes day-to-day market analysis a lot more difficult. Monday's global stock plunge followed reports of a Greek default. Stocks are now bouncing on reports of a possible Greek compromise. I don't know if today's reports of a Greek compromise are for real, but I'm reluctant to make investment decisions based on that possibility. So today I'm going focus more on the U.S. stock market's longer-range picture. After Monday's stock plunge, I doubted that all of the selling was due solely to developments in Greece. I mentioned that a number of negative stock divergences have existed in the U.S. stock market for several months, and set the stage for a possible selloff. Last Wednesday, I wrote again about the continuing negative divergence between the Dow Industrials and downtrends in the Dow Transports and Utilities, and how weakness in the latter two groups was pulling the Dow Jones Composite Average lower. Chart 1 shows the DJA falling to an eight-month low this week. The Dow Jones Composite Average has had a 90% correlation with the Dow Industrials over the last ten years. A drop in one usually leads to a drop in the other.
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Chart 1
WEEKLY RSI SHOWS NEGATIVE DIVERGENCE... Back on May 30, I wrote about the large negative divergence between the Dow Industrials and its 14-week RSI line. Chart 2 is an updated version of that same chart. The weekly bars show the rally in the Dow since spring 2009. During those six years, the only significant correction took place during 2011, when the market dropped nearly 20%. It's been uphill since then. What's troubling to me is the big negative divergence between the Dow and its 14-week RSI (red line). That divergence is especially noteworthy this year. While the Dow hit a record high during May, the RSI line has dropped below its midpoint (dashed) line. In a healthy uptrend, the red line should be rising. A falling RSI line usually signals loss of upside momentum.
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Chart 2
WEELY MACD LINES ARE ALSO FALLING... Chart 3 shows a similar negative divergence between weekly Dow Industrials and "weekly" MACD lines. There again, the negative divergence between them has become more pronounced during the first half of this year. The weekly MACD lines are not only negative (black line below red line) but the two lines are diverging. At the very least, the faster black line needs to start rising. Then, it has to cross back over the slower red line. It's hard to imagine the Dow staging a strong rebound until that happens. In the meantime, the falling MACD lines raise the risk of a selloff in stocks.
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Chart 3
MONTHLY MACD LINES ALSO TURN NEGATIVE... Signals on "weekly" indicators are a lot more important than signals on "daily charts". By the same token, "monthly" signals are more serious than "weekly" signals". Which is why Chart 4 also has me worried. Chart 4 shows that "monthly" MACD lines have also turned negative for the Dow. That in itself is a caution signal, because it implies that the market's major uptrend may be stalling. Even more troubling is that the negative "spread" between the two lines is now at the widest since 2009 when the market was turning up. That can be seen by looking at the amount the histogram bars (which plot the difference between the two MACD lines) are below their zero line. With June having just ended, the monthly lines show their month-end value. In fact, the monthly MACD lines have been in negative territory for the last five months. That doesn't predict a major downturn like we saw in 2008. But it suggests that the stock market may be at its most vulnerable position in several years. That's often when accidents (like Greece) can cause bigger problems. [Erin Heim's June 30 blog reported that four U.S. stock indexes are on "monthly" PMO sell signals. That appears to confirm the downturns in monthly MACD lines].
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Chart 4
LESS THAN HALF OF NYSE STOCKS ARE IN UPTRENDS... Here's one more negative divergence that has me worried. The weekly red line in Chart 5 plots the percent of NYSE stocks above their 200-day moving average. The black line is the NYSE Composite Index. It's better when the two lines are rising together. That's clearly not the case right now. The red line peaked at 65% during April. That meant that only two-thirds of big board stocks were in uptrends when the NYSE Index hit a new record. Since then, the red line has fallen to 44%. That means that more than half of NYSE stocks are below their 200-day averages. Meanwhile, the NYSE Composite Index is within 4% of its spring high. Obviously, that situation has to improve. How can a bull market exist on the New York Stock Exchange when more than half of its stocks are in dowtrends?
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Chart 5
TIME FOR MORE CAUTION ... Longer term indicators suggest that the stock market is suffering deterioration beneath the surface. In the past, those types of negative divergences have usually led to market corrections. Maybe this time is different, but that's often a dangerous bet. Developments in Greece will no doubt influence short-term market direction, but it's the longer-range trend that I'm more concerned about. It's still up, but there are danger signs. At the same time, we can't ignore the short term picture. The daily bars in Chart 6 show the Dow Industrials trying to stabilize at its 200-day average. It's still well below its 50-day line and its June high. Chart 7 shows a similar situation for the S&P 500. It's important for both indexes to stay above their 200-day lines. Chart 8 shows the Nasdaq Composite trying to regain its 50-day line. A Greek resolution would probably give a boost to stocks over the short run. The weekly and monthly charts shown herein, however, suggest stocks may have bigger problems to deal with.
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Chart 6
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Chart 7
