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A Contrarian Look At New Stock Market Highs

Published 09/22/2013, 12:18 AM
Updated 07/09/2023, 06:31 AM
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Despite favourable news (Fed did not taper while economic indicators are picking up), stock market bulls should pay attention to some of the underlying issues which could be warning signs that the bull market is finally in a topping process. Here are few interesting charts, but more will be covered in my upcoming newsletter.

Chart 1: Homebuilders and Financials sectors failed to make new highs!
Homebuilders & Financials
Since the intermediate market bottom in early October 2011, the two sectors have have really benefited and lead the overall market higher have been homebuilders and the financial sector. The chart above shows that both sectors have more than doubled over the last two years and are now overdue for a correction.

However, both sectors have recently failed to make new 52 week highs, even though the S&P 500 did. As I have stated many times here and in my newsletters, whenever an asset fails to make a new low on unfavourable news or new highs on favourable news - there is an above average chance that the market has already discounted the current conditions. This is usually where a trend reverses.

Chart 2: Despite new bull market highs, breadth is deteriorating
Stock Market Breadth
Furthermore, despite the S&P 500's ability to make new highs into August and once again into September of this year, the number of stocks trading above important moving averages is falling. In other words, there are fewer and fewer stocks remaining above the 50 day, 150 day and 200 day moving averages (charts above). This lets us know that some stocks are already turning into a downtrend and if the deterioration continues, the overall stock market could start to top out. Keep a close eye on these indicators!

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