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Yes, the S&P 500 index broke above the 1130 level that had provided resistance for the summer. That’s an undeniable fact. But I’m still skeptical that it has truly broken out of the summer doldrums that has kept stock prices in a listless trading range.

I was similarly skeptical in early August as the S&P 500 index was pushing against resistance at 1130. While breadth measures like the NYSE cumulative advance decline line had made new highs, other indicators like the S&P 500’s own cumulative advance decline line or the McClellan Oscillator were saying otherwise.

The situation right now is very analogous to early August. The stock market has clamored higher and yes, reached a new high after breaking through resistance. But that effort has left it wheezing and out of breath - and breadth. Current market internals are more favorable towards the bulls not only because of the technical break out but also because both the NYSE cumulative AD and S&P 500’s AD are supporting higher prices. Both of those market breadth metrics has been able to keep up or lead the index (click to enlarge):

cumulative AD NYSE SPX breakout Sep 2010

But this has come at a cost. Right now, the S&P 500 index is too overbought to be able to sustain a meaningful rally. And there is a real possibility that it may slip back into the summer trading range, frustrating the bulls yet again.

Here’s a comparative chart of the percentage of S&P 500 index components trading above their 50 day (simple) moving average (click to enlarge):

percent S&P500 above 50 MA Sep 2010

On Monday (September 20th, 2010) 86% of S&P 500 stocks closed above their intermediate term moving average. That was the highest level of overbought since mid-April 2010 when the market topped.

Also, don’t forget that we are smack dab in the middle of the worst annual seasonality. As Wayne outlined last month, September is the weakest month of the year and the weakest portion of September occurs during the last 10 days of the month.

I’m sure it was a statistical fluke that the market halted its breakout advance on September 20th, exactly as seasonality dictates. The caveat that I always mention with seasonality studies is that an average doesn’t dictate a definitive path for the market going forward. But it does mean that statistically speaking, the odds are in favor of the bears. At least for now.