[isatrader]

The S&P 500 etf (SPY) and Russell 2000 Small Caps etf (IWM) Effective Volume charts have broken down from their recent sideways range. The Russell 2000 Small Caps (IWM) is seeing the most notable selling this week breaking strongly below it's two month range. Whereas the Nasdaq 100 etf (QQQ) has broken out to the upside from it's one month range. To see the regularly updated charts go to: http://www.effectivevolume.com

[goodtyneguy]

I've reproduced an interesting article from McClellan Financial Publications the founder of the McClellan Oscillator found here


I can't think why the bond market not participating in the overall market breadth should be a harbinger of liquidity problems for the stock market. I would have thought it would have been the other round, that is, capital moving from stocks into the relative safety of bonds.

Bond CEFs Now Saying Liquidity Is In Trouble

   

April 05, 2013

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Shortly after the Flash Crash in 2010, I wrote a Chart In Focus article explaining that the problems that the stock market had just been through in the wake of the Flash Crash were not liquidity problems. I cited as evidence then that we were still seeing strength in the Advance-Decline (A-D) Line for bond-related closed end funds (CEFs) traded on the NYSE. We are seeing a different situation now, which is worthy of mention, but first we should review the terms I am using.

Only about 60% of the issues traded on the NYSE are real "common" stocks, things we would think of as the shares of real operating companies. But they generally trade about 90-95% of the share volume every day.

The other types of NYSE issues are made up of preferred stocks (18%), foreign issues (11%), specialty issues (13%, including rights, warrants, and structured products), and bond CEFs (8%). Of these, bond CEFs are the ones most often blamed for "contaminating" the A-D data of the overall NYSE, and so a lot of technicians prefer to use some purified version of A-D data to avoid that contamination.

I take the opposite view. If anything, the bond CEFs improve the composite A-D data by virtue of their presence. The reason for this is that the main virtue of A-D data is as an indicator of market liquidity. It is possible to push the major large-cap indices higher during an illiquid period if the limited liquidity is channeled into the "right" stocks. But to get the large majority of stocks to go up, there needs to be such prolific liquidity that there is enough to go around for everybody.

When liquidity starts to dry up, the least deserving issues tend to get culled first from the herd. That is what we are seeing now in the bond CEF A-D Line. These liquidity-sensitive issues have already turned downward as a group, even though the SP500 was able to continue higher. This is a message that there are now liquidity problems facing the market, even though the Fed is continuing to drop money from helicopters every month. Perhaps $85 billion a month is just not enough.

The 2007 example in this next chart helps us to understand why this warning sign is so important. The bond CEF A-D Line peaked back in May 2007, even ahead of the overall A-D Line which peaked in June 2007, and ahead of the final market price high in October 2007.

   

The larger point is that these issues are more liquidity sensitive than others. So if we see them suffering as a group, then the message is there is a liquidity problem which will likely come around to bite the rest of the market. And when the market sees a meaningful dip for the SP500 without the bond CEFs getting hurt, the message is that it is likely a problem other than liquidity, e.g. geopolitics, investor mood, etc. Those are easier problems for the market to get through than liquidity problems, which take longer to solve.

There is one notable anomaly in the middle of the chart which is worthy of mention. Back in 2010, the impending end of the "Build America" bond program caused a lot of municipalities to rush some muni-bond issuances to market and take advantage of the free money from Uncle Sam. That glut of new issuances then was more than the bond market could easily absorb, and so a lot of muni-bond prices fell as a result which took down the prices of some of the bond CEFs. So that was an example of when the bond CEF A-D Line was "wrong" about an overall market liquidity problem. We don't face a similar anomaly now.

It is hard to get one's mind around the idea that the stock market could be facing a liquidity problem when the Fed is throwing $85 billion a month at the banking system. But that is the message here, from examining the actual behavior of those issues who are most sensitive to it.



Tom McClellan
Editor, The McClellan Market Report

I useful addition to the MB indicator list if it's possible to locate the source of the data.

I have not been able to do much this week as I've had three days of trouble with S***Trader and their charts (my only live data feed, allegedly)and its still not completely resolved. Anyone thinking about opening an account with them please PM me, it may save you a lot of hassle.

.

[isatrader]

It was a big week in the sector breadth charts with a lot of sectors making strong moves downwards. Five sectors changed to a sell signal, to make a total of eight down sectors and only one up sector. The sector breadth visual diagram that shows all the sectors together highlights the negative change when you compare to last week with a number of sectors moving boxes, which doesn't happen that often as each box represents 10% in size.

The biggest faller this week was the weakest sector Basic Materials, but the overall strongest sectors took a big hit as well with Industrials and Financials dropping large amounts also. Only Utilities managed a small gain on the week, showing there was some rotation to defensive stocks and not complete liquidation across the board. But it was a heavy down week and so the weighting for this breadth measure has tilted to the Bear side now.

Below is the data table for the Percent of Stocks Above 150 Day Moving Average in each sector which I've ordered by relative strength, with the highest to the lowest percentage in each sector. Also attached is the visual diagram of the 9 sectors and the overall NYSE Percentage of Stocks above their 150 day Moving Averages, plus the 1% P&F chart and line chart of the nine sectors.

[isatrader]

Attached is the NYSE long, medium and short term moving average breadth charts and the NYSE Bullish Percent Index.

The short term moving average breadth charts continue to be where the noticeable action is currently, with all four moving to Bear Confirmed status during the week. The medium to longer term charts also dropped, but didn't made any status changes.

So the weighting for the major moving average breadth charts moves firmly to the bear side in the short term, with plenty of downside space to drop from. While the medium to long term continues to be on Bear Alert.

[isatrader]

Attached is the updated volatility breadth charts which have moved to Bear Confirmed Status imo, across the short, medium and long term time frames.

[isatrader]

Attached is the updated Advance Decline Breadth Charts, including the cumulative AD line, momentum index, cumulative AD volume line, 10 Day AD oscillator, NYSE Volume Advancing / Volume Declining Ratio etc, which are starting to show some bearish signs with a few early breakdowns and noticeable divergences. They haven't given any major sell signals yet, but are certainly suggesting that we should be alert to a breakdown at least.

[isatrader]

Attached is the New Highs / New Lows charts. The New Lows (red area on daily chart) picked up this week, to challenge the top of their range from this year, but closed the week slightly off of those levels. The New Highs saw a notable drop though, to close the week at 148 which is the lowest level since late February.

On the cumulative chart you can a see a small divergence on the 50 day MA of the New Highs - New Lows which is rolling over "notably" for the first time this year. Although the straight cumulative chart is still pushing new highs itself.

[isatrader]

This week saw the S&P 500 Cumulative P&F Breakouts - Breakdowns chart begin to rollover towards it's 20 day MA, which I use as the signal line. It hasn't crossed below yet, but the Oscillator chart - which is a flattened version of the cumulative chart with the 20 day MA as the zero line - shows the divergence from the January peak to the March peak which is notably lower and the figure is now only 8.5 points from the 20 day MA, and so could be reached next week if the short term negativity continues.