Sunday, September 28, 2014

Stock Market Exhaustion Indicators, Divergences Still Warning about Downside (9/28/2014)

This post was originally on the Dvolatility Research blog on 9/28/2014.

The stock market (Wilshire 5000) is still exhausted based on the Wilshire 5000's percent change from a year ago; and, in my opinion, the Wilshire US Small-Cap and Micro-Cap Total Market Indexes are providing confirmation (second chart). The first chart shows the Wilshire 5000's percent change from a year ago versus the Wilshire 5000's price since the late nineties. On the chart, you can see that bearish divergences between the Wilshire 5000's price and percent change from a year ago usually predicted corrections. On July 30, I wrote that "I think the indicator may be repeating its 2007 pattern, when it exhausted to the upside for the second and final time in a mature bull market," which I think still holds true today.

Wilshire 5000 Total Market Index vs. Wilshire 5000 Total Market Index's Percent Change from a Year Ago

Source: St. Louis Fed (keep track of this interactive chart here and adjust the date)

The Wilshire US Micro-Cap Total Market Index's percent change from a year ago is almost at zero as the Wilshire 5000 Total Market Index continues to make new highs. This steep divergence is telling me that the stock market is trading on thin ice right now. The U.S. stock market's new highs-new lows indicator is also around the zero mark, so it's probably a good idea to own downside protection on a rolling basis at this point to hedge against a spike in new 52 week lows.

Wilshire 5000 Total Market Index vs. Wilshire 5000's, Wilshire US Small-Cap's, and Wilshire US Micro-Cap's Percent Change from a Year Ago

Source: St. Louis Fed (keep track of the interactive chart here and adjust the date)

Wilshire 5000 Total Market Index vs. Wilshire US Micro-Cap Total Market Index's Percent Change from a Year Ago

Source: St. Louis Fed (keep track of the interactive chart here and adjust the date)

There have also been bearish price divergences between the Wilshire large-cap, small-cap and micro-cap indexes since July, or since March when looking specifically at the micro-cap index versus the large-cap index. This divergence is either saying that micro-caps are a screaming buy here, or that risky micro-cap stocks are sending out a bearish signal for the overall market. I think it's the latter. See what happened at previous market tops.

Wilshire US Large-Cap Total Market Index vs. Wilshire US Small-Cap and Micro-Cap Total Market Indexes (price divergences)

Source: St. Louis Fed (FRED) (live chart)

Related post on the Dvolatility Research Stock Market Exhaustion Indicators

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