Daily State Of The Markets: Is It 'Time' For A Major Correction?

Includes: DIA, IWM, QQQ, SPY
by: David Moenning

This report is being written on Sunday, April 13 and is slated to be published on Tuesday, April 15. As such, there will be ample time for the algos to "go the other way" and make the subject matter about to be discussed seem untimely and/or not necessary. However, since the research being presented is big-picture oriented with long-term implications, it could prove valuable to investors - even if stocks have rebounded strongly early in the week.

As I have stated a time or two hundred, the real key to long-term success in the stock market is finding a way to ride the bull market waves and then trying your darndest to avoid being brutalized by the bears.

One of the best ways to accomplish this seemingly difficult task is to understand that the market moves in cycles. No, this will not be a discussion of the Elliott Wave or even the cycle composite we review on a daily, weekly, and monthly basis. In this instance, we will be looking at bull and bear cycles and some signals that can help put investors on alert for when a bull is about to end.

But first, there is one additional caveat that needs to be addressed. Remember, no one rings a bell when bull markets ultimately top out. And trying to top-tick a move that generally lasts years is a fool's errand. This is why so many investors are ill prepared when a bear begins. The key is to understand that the research presented is designed to be a warning sign and NOT a signal to sell everything and hide under your desk.

Warning Sign #1: 52-Week Highs

In case you are not aware, new 52-high and low totals are considered some of the best leading indicators of major trend changes. Yes, this is old-school stuff. No, it isn't fancy. But it does work!

The bottom line here is simple. The number of new 52-week highs tends to peak LONG before the market does. Therefore, if one understands this, they shouldn't be terribly surprised when the bears return to the game in earnest.

Take a peek at the chart below. This is a daily chart of the new 52-week highs on the S&P 500 from September 2006 through early April.

S&P 500 New Highs and Lows

Please accept my apologies for the quality of the chart, as it is admittedly quite poor. But the message should be clear. The number of new highs tends to peak well before price does. And the main point is that new highs peaked last spring.

The situation is the same when looking at the NYSE data. Although the NYSE is full of non-operating companies (i.e. not common stocks) new 52-week highs peaked back on May 10, 2013.

Why You Should Care

The reason you may want to check in on this data on a regular basis is that since 1962, new 52-week highs on the NYSE peak, on average, 224 trading days before the market does. And if we look at the median, new highs have peaked 184 days before the market has.

So, it's time to get out your calendar. Since there are 252 trading days in a year, this means that on average, since 1962, the stock market has peaked between 9 and 11 months after the peak in new highs. So... given that the peak was 5/10/2013, it would appear that the timing might be right for a major peak in the overall stock market.

Warning Sign #2: Demand Volume

A similar message can be derived from the study of demand volume (think up volume). Since 1982, Ned Davis Research tells us that demand volume has peaked, on average, 353 trading days before the ultimate peak the S&P 500. And for those keeping score at home, the median peak lead time is 241 trading days.

When did this indicator peak, you ask? Not surprisingly, the peak in volume demand occurred around the time that new 52-week highs peaked: 5/21/2013.

So...if we add a year (or so) to 5/21/2013, it is pretty easy to see that the the average lead time between peaks in demand volume and the S&P is very close at hand. Therefore, after taking a year off in 2013, the "sell in May and go away" rule may very well apply again this year.

The Key Point Is...

The key takeaway here is that we are NOT trying to predict a market top. No, the idea is that if one knows what has happened in the past, they may be able to be better prepared when the bears return to the game.

And based on these two indicators, it looks like the bears' time to shine may be upon us again soon.

Publishing Note: I have an early meeting on Wednesday and will not publish a morning missive.

Turning to This Morning...

Tensions in Ukraine continue to mount. However, traders have plenty else to occupy themselves with this morning including new concerns about China's credit and economic growth, improved economic sentiment out of Europe, and a big slug of earnings and economic data data here in the U.S. In addition, Fed Chairwoman Yellen will deliver opening remarks at a conference starting at 8:45 am. In early trade, bond yields are rising, and both oil and gold are falling. U.S. futures are pointing to a slightly higher open after KO's earnings report.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

- Japan: -0.36%

- Hong Kong: +0.15%

- Shanghai: +0.07%

- London: -0.38%

- Germany: -0.56%

- France: -0.43%

- Italy: -0.90%

- Spain: -1.25%

Crude Oil Futures: -$0.09 to $103.65

Gold: +$3.20 at $1332.20

Dollar: lower against the yen, higher vs. euro and pound

10-Year Bond Yield: Currently trading lower at 2.635%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: +4.96

- Dow Jones Industrial Average: +44

- NASDAQ Composite: +11.15

Thought For The Day... Beware the barrenness of a busy life. -Socrates

Positions in stocks mentioned: none