NYMO - Shooting Off Its Own July 4th Fireworks

Well it's the eve of another glorious birthday for the USA and we'd like to take this opportunity to wish our American brethren our most sincere best wishes for another happy and prosperous year.  In fact we hope it's even better than the last one.  God knows, it had better be.  So over the past two weeks, perhaps in celebration of another upcoming glorious chapter in the story of the United States of America, the markets have partied like there's no tomorrow (perhaps not the best choice of words) and have run up so far, so fast that suddenly we find ourselves looking at a divergence situation in the McClellan Oscillator not seen since this very weekend of last year.  Also of note is the very intriguing fact that this same time period (between the last day of June and July 4th) has marked a very important turning point in the markets for the past 3 years running (more on that below).  This short one week period produced a low in 2009, another low in 2010 and a peak in 2011.  If this same week in 2012 is going to also mark a crucial turning point in the markets, it's pretty difficult to imagine it as being a low.

In the daily chart of NYMO below we can see how this divergence has developed:

NYMO Daily - Click here for a live and updating version

Before we begin, please note that of all the market internals indicators, some are relatively quick and 'reactive' to daily market conditions and some lag the markets by a few more days.  NYMO is one of those quicker ones... it's one of the first to issue warnings.  On the other hand, the Summation Index (a derivative of NYMO) is one of the laggards, typically reacting 3 or 4 days after a major turning point.  Not always, but usually.  Ok, so now that we're clear that today's discussion is about one of the indicators that is fairly sensitive, we begin...

Of prime interest here is the fact that at the end of June, NYMO registered the highest monthly reading of all time.  Interestingly, the last time it was up in the nosebleed section like this was in May of 2004, a full year after the market low of March 2003.  It just stands to reason that after stocks have gone through a crash such as that which occurred between Aug. 2000 and 2003, perhaps as many as 90% of all stocks had been declining.  So it's natural that once a recovery takes hold, a whole lot of those 90% of stocks that had been declining suddenly begin to rise in unison.  And of course that quickly shoots the McClellan Oscillator through the roof.  The exact same effect occurs with the much esteemed Zwieg breadth thrust indicator, but from past experience I can assure you, 95% of investors I've run into simply cannot understand how a breadth thrust can happen on a mere recovery off a severe low (which can turn out 'not' to be 'the' low).  They laugh at me.  I smile politely as I quietly relieve them of their wallet.  But I digress.

So we now have to ask the questions: "Are we seeing the markets just at the verge of cracking up and heading toward 1100?  Or are we seeing the markets on the verge of a new bull run such as that magnificent rally that began in March 2003 and lasted four and a half years?"  To tell you the truth, as far as the McClellan Oscillator is concerned, it really could be either.

So we zoom out a bit and take a look at the weekly chart of NYMO below:

NYMO Weekly - Click here for a live and updating version, complete with a few more indicators

At the end of June, the McClellan Oscillator closed the month at the highest reading of all time (on a monthly basis).  On a weekly basis, and even as of this evening, NYMO is currently sitting at the second highest reading of all time.  Looking at both charts above, in consideration of where the McClellan Oscillator currently resides, the only thing we know with 100% certainty is that the market is going to be headed south at any moment.  Perhaps it will begin with the market open on Thursday.  Perhaps the rally can even last as long as to finish out the week a bit higher.  But it's going to pull back.  If you're long... get out because the potential for downside risk dwarfs any reward you could possibly gain over the coming weeks.  You got your 8% in six days... now take it off the table.  This is a conclusion that's not even open for debate.  C'mon investors, the markets have just put in a magnificent 8% rally in 6 days, closing on the one week window that has marked a major turning point in 1998, 1999, 2003, 2006, 2007, 2009, 2010 and 2011.  True enough, not all of them were tops.  But if a turn is going to happen during this same week of this year, I can tell you this year it ain't going to be a low.  The question that is still open for debate is how far that pullback is going to go.  That part I don't pretend to know.  All I'm very comfortable with is that the market internals are sending a signal that basically says "enough already" and that we'd best be prepared for the inevitable... and that being "no bulls, you're not going to get another 8% over the next 6 days."

Every once in a while we hit the end of the road

And finally, the divergence that has developed is not a bearish divergence but a negative divergence.  They are not the same thing.  The bearish divergence, one in which the index makes a new high but it's indicators do not, does not offer measurable targets.  The one we're looking at today is a negative divergence, one which 'does' offer a measured move possibility.  In these cases, the indicators make a new high but the index does not.  With the negative divergence set-up that we're faced with currently, we're looking at a measured move to 6234 on the NYSE (NYA) and 1118 on the S&P 500.  I wish I could offer a money back guarantee that these targets are going to be hit.  But considering that we're now living in a matrix where the central banks of the world just keep pulling one green rabbit after the other out of their greasy asses, who in heck knows for sure whether or not these divergences and the message they deliver will be obeyed this time around?  If there were no such thing as central bankers I'd offer that money back guarantee.  Mind you, if there were no such thing as central bankers the Dow never would have gotten over 1000 in the first place.  So stay tuned... the potential for a big decline does indeed exist despite the stink of euphoria permeating the planet's otherwise breathable atmosphere.

Wishing all of you nothing but success going forward... and a beautiful and happy summer.

Until next time....

END OF ORIGINAL POST

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UPDATE: July 4th, 2012

Papa_Boule has made reference to a couple of great 'broad measures', the GDOW and VEU (the ETF that includes everything BUT the US indexes).  In the interest of providing a 'visual' for our discussion, I've added a daily version of GDOW below:

GDOW Daily - Click here for a live and updating version