Market starting its 7 week decline

Market Commentary:

Simply put, equities are being pressured since last Monday’s big sell off. This is characteristic of an intermediate top. And there are many signs pointing to the development of a correction.

I don’t think the bulls/interventionists are done, though. This is the time of the month when it is better to be long than out of the market – that famous “window dressing” period.

But after six weeks of gains, the rally appears to be exhausted.

The media would have you think that a flu bug is responsible for bearish pressure in the stock market, but that is a lot of bull (pun intended). There is hardly a stock you can find that isn’t stretched to the upside and due for a pull back.

This week is shaping up as week 2 of an intermediate decline, though a final buying push might set one more high before a strong pull back develops.

Let me show you a different technical chart that clearly illustrates buying exhaustion:

This indicator is called the McLellan Oscillator. The grey candlestick pattern in the background is the S&P 500 prices over the last 14 months.

Notice that in the March-May time frame last year that this indicator was in the positive area for around seven weeks. And then it began a jagged descent into negative territory settling at -75 by July. During that same time the S&P 500 went from a high of 1440 in May to a low of 1200 in July (a 17% drop).

This indicator quickly returned to positive territory in late July where it hovered between 20 to 60 for another seven week period. During this period the S&P 500 rallied almost 100 points to just under 1300.

And once again, this indicator began another jagged descent to a significant low around -120. And that low point was reached in October, where the S&P also declined to a new low at 839. The 13,000 to 839 drop was a huge -35% decline.

And like before, this indicator did not stay down but advanced over a 3-week period to the 100 level. The S&P 500 recovered some, from 839 to a high of 944. And then the indicator did a quick reversal as did prices and settled at -100 while the S&P 500 set new Bear Market lows at 666, known for quite a while as the “November Lows”.

Notice how rapidly this indicator accelerated to the 25 to 80 point area, where it again hovered for close to seven weeks, as the S&P 500 rose from the November lows to an intermediate high of 878 in January of this year.

After remaining in positive territory for seven weeks or so this indicator once again began a jagged course of declines, landing just below the -125 level. The S&P 500 reached new lows a couple of weeks later – in March of this year, now known as the “March Lows”.

During this last rally this indicator has risen once again to the 100 level in mid March and has hovered in the 25 to 80 levels for just over seven weeks. During this same period the S&P has gone from a low of 666 to a high of 876 just over a week ago (a 32% rally).

I am sure you have picked up on the “seven-week” interval I have repeatedly referred to. By all rights, this chart is telling me that it will begin another jagged course downward, in synch with declining prices on the S&P 500.

The declining periods have ranged from 6-8 weeks over this 14-month time frame and the advances have been centered very closely into a tight “seven-week” interval.

I cannot say that this means for sure that equities will decline for the next 6-8 weeks, but the odds seem to be much better for prices to fall during these coming weeks than for prices to rise.

This is just another technical indication of an intermediate top and a likely correction that has begun to play out right now.

I could explain a lot of daily market movement via investor concerns over the Bank Stress Testing or the Automaker’s Recovery Plans, or the nationalization of both Banks and Automakers by our government and the shafting of bond holders, or the presence of a new flu virus. But these are all smoke screens for what simply looks to me like an intermediate top.

I still remain highly focused on where the next intermediate low settles and suggest a defensive posture while we wait it out and try to develop a clearer picture.