S&P 500 vs. US New Highs-New Lows Breadth Indicator Shows Underlying Weakness In Stock Market (Extra Charts)

This post was originally on the Dvolatility Research blog on 9/23/2014

I see a bearish divergence between the S&P 500 (SPX) and the US New Highs-New Lows (5 day total) indicator ($USHL5) on the chart below, which shows that U.S. stocks aren't as strong as the S&P 500 Index makes them out to be. The bearish divergence looks similar to the divergence that occurred in 2007 right before the market peaked, but with less downside action so far. So I think you should expect more volatility and a sizable correction in the near-term, which, in my opinion, would continue to build out the top of this bull market.

Keep in mind that a bearish divergence could also be a contrarian indicator for the market. I showed you examples on my previous post (also see October 2013's divergence on DistressedVolatility.com). But since the current divergence has a long duration (actually the longest divergence on the chart) and looks similar to 2007's divergence right before the market peaked, I think it should be taken seriously.

Source: StockCharts.com

Source: StockCharts.com

These charts should have been on my previous post, where I provided weekly breadth and momentum alerts for SLY (already in a bear market?), MDY, SPY, DIA, QQQ, and IYT.

David Rosenberg of Gluskin Sheff also believes that the "lack of breadth" combined with an overvalued market could cause a 5 to 10 percent correction in the near-term. Also read John Hussman's interesting views on the market at DistressedVolatility.com.
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