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In January, Brad Lamensdorf (CEO of Lamensdorf Market Timing Report) noted seven charts to watch as historic indicators are showing that market expectations are extremely optimistic.

His latest report begins ominously - "Watch-out, indicators point to a break in the stock market" signaling investors to be almost 50% short...

As the indexes continue to produce a series of higher highs, subsurface conditions are painting an entirely different picture. The market capitalized indexes are dominated by names such as Amazon (AMZN), Microsoft (MSFT) and Johnson and Johnson (JNJ). The good performance of these large companies is masking the fact that many stocks, including REITS and those in the retail sector, have already entered bear market territory. This issue of LMTR focuses on market breadth, which has become exceedingly negative.

The cumulative 21-day advancing/declining volume indicator measures the internal dynamics of the market by monitoring up/down volume. We have highlighted the previous four peaks in order to emphasize the series of lower highs in the up/down volume gauge. This situation has occurred while the indexes have simultaneously hit higher highs; a classic negative divergence illustrating that large institutional sponsorship has not been following the indexes.

 

The Ned Davis Research proprietary supply/demand indicator is extremely useful for judging underlying buying and selling in the market. The demand gauge has begun to weaken, and it has failed to participate in the recent rally. At the same time the supply side component has started to rise along with the market, suggesting that there could be a trend change in buying and selling.

 

An alarming percentage of NYSE and Nasdaq stocks are hitting 52-week lows. Sentimentrader has created an excellent study that explores this phenomenon. The study analyzed the percent of NYSE and Nasdaq stocks at 52-week lows when the S&P 500 closes at a record high. Recently there were more than 340 securities that sank to 52-week lows, the second highest level going back as far as 1965. Similar spikes occurred in 1973 and 1999, both directly preceding significant corrections.

 

Over the last year fewer and fewer stocks have participated in the market rally. Sentimentrader has created a unique indicator that quantifies the narrowing of stocks participating in a rally. They went back to 1995 and analyzed closes on the Russell 2000 that were at three-year highs while less than 5% of the stocks were at 52-week highs, indicating sell signals. Arrows have been placed at areas on the chart to highlight such occurrences. There have been five sell signals over the last 20 years, and one of them is occurring now. The 1996 signal was followed by a year-long flat market. The 2000 and 2007 signals identified incredibly rough bear markets, and the 2015 signal coincided with a 20% Russell correction.

What will the result of the current sell signal be?

Lamensdorf concludes:

Serious market corrections do not occur out of the blue.

 

Indicators, such as the ones highlighted in this month’s report, help investors identify when corrections are long in the tooth and rallies are beginning to wane.

 

Presently the indicators are suggesting a top. We remain 50% short.