For the first time since last October, the broad market indices have
broken down -- violating the major trend line that had identified the
bull market. This is a very negative development and should be
heeded. While everyone recognizes the severity of this breakdown,
there is disagreement among analysts on how severe it is. Some think
the market is in a trading range (bound by the January lows and the
February highs; blue lines on Figure 1), but we think it could be the
beginning of a more severe decline. The failure of the upside breakout
two weeks ago, coupled with the violation of the trend line (red line,
Figure 1) add up to a potentially large "negative," in our opinion.
What will be the determining factor between "downtrend" and "trading
range," of course, will be whether the market can hold at or above
January's lows.
Equity-only put-call ratios remain on sell signals (Figures 2 and
3). They are accelerating upward right now, and they have plenty of
room to go before they might be ready to generate buy signals.
Breadth (advances minus declines) has been dismal for over a
week now. That has pushed both breadth oscillators into negative
territory. In fact, the NYSE-based oscillator has fallen faster than the
"stocks only" and it is officially oversold. However, "oversold" does
not mean "buy." The "stocks only" oscillator has not yet reached
oversold territory. The oversold condition of these indicators reflects
the fact that the broad market might also be oversold. However, while
that might mean that sharp, short-lived rallies are possible, it is worth
remembering that the market can decline sharply when it is oversold.
Finally, there is volatility ($VIX). It has remained rather dormant
refusing to climb above the 14 level. Perhaps this means that we are
in a trading range, but it is not without precedent for $VIX to remain
low while the market makes its initial decline. Look at the circled area
on Figure 4, which depicts what happened just about one year ago: the
market had declined but $VIX was not moving higher. Then, the
market went into a further, more accelerated, decline, and that caused
$VIX to finally spike higher -- eventually giving a buy signal on that
spike. So, we think that this market will move lower and will
eventually see $VIX spike up as it does.
The bottom line is that we view the breaking of the uptrend line
as significant, especially in light of the other negative indicators.
