Remember this chart?
I unveiled it in December of last year to warn of a degree of buying pressure which, over the past 15 years, had invariably flagged up an on-coming market correction.
Well no sooner had that pressure been alleviated in the recent decline than a surge of buying pushed it straight back up again. Last week, Net New Highs on the New York Stock Exchange were back to almost exactly where they were before.
This implies either that another decline is in the cards or that the market could edge higher, but in an increasingly choppy manner, as we saw in late 2003 - and with the likelihood that any gains would subsequently be wiped away, as occured in early 2004.
For day and swing traders this presents an opportunity to take advantage of possible weakness over the next couple of weeks, whether or not there is a more substantial correction. Take a look in close up at all the signals since this bull market began:
NYSE Net New Highs extreme readings since March 2009
Selling tended to pick up notably in the short term, with the two exceptions (March & December 2010) coming in the wake of corrections, with a powerful wave of buying beginning a new upleg. While this may be one of those occasions, the price action seems considerably more tentative than it was in those two instances, and last week's down close does not inspire confidence.
Also concerning is the fact that the Russell 2000 small-cap index, which had been leading the market higher consistently since the bull began, recently began to lead it lower. My suspicion is that a gradual change is afoot, and I'll be detailing my thinking in the next few posts.
If you've been considering buying stocks now I'd be wary (the time to do so was in mid-March when stocks were 7-10% cheaper) but if you are tempted, please be aware that risks are considerably more elevated than the price action would appear to suggest.
The Curse of the Domed House!