Jerry Samet
06-02-2013, 11:52 AM
The market had another nasty sell off on Friday. After being down all day the major averages sold off hard into the close and finished on the lows of the session. The decline ranged between 1.0% on the COMPQ and 1.4% on the SPY. Volume was higher across the board producing distribution on all the major averages. There are now five distribution days on the SPY and four on the COMPQ. All of these have occurred in the last eight trading sessions. This high distribution cluster is dangerous and IBD went to rally under pressure. Leading stocks also sold off on Friday as the leaders index declined .50% on heavy and above average volume. The index remained below it’s important 17dma and the 9dma has broken below the 17dma. Quality stocks are acting a bit better than the overall market, but that is about the only positive in the last couple of weeks. There have been some other worrisome signs recently. The Hindenburg Omen has signaled twice in the last few weeks(for those who are not familiar with this indicator just Google it). This constitutes a sell signal from an indicator that signals the end of cyclical bull markets. The last time there were these signals was in 2007 when a string of them warned of the end of the cyclical bull market of 2003 to 2007. Also liquidity has been the basis of this entire cyclical bull and any problem in this area is dangerous. Sherman McClellan has said that closed end bond funds are a good indicator of liquidity as the are easy to trade and they use margin to goose their returns. I watch an index of over 500 closed end bond funds and have included a chart of this index in today’s report. It shows a strong break down on heavy volume in the last couple of weeks. This shows a decline in liquidity which coincides with the recent stock market decline. Major market tops are a process that can unfold over a period of months. There are building signs that such a process is under way. The Fed could jump in with even more liquidity and try to turn things around, but the evidence that not only the current rally but the entire cyclical bull that started in March 2009 is in trouble are mounting. Jerry