As mentioned in the past several weeks, what is particularly encouraging is the positive trend is being echoed in ex-US markets. The Euro 350 made new uptrend highs, the All World Ex-US index is close to doing so and EEM is outperforming SPX (chart). In 2013, the US has led, often alone; now, other markets are pushing higher as well.
Add to this both low volatility and macro beating expectations by the most in almost two years (chart), and investors have a feel-good story.
And there is no doubt investors feel good. All three put/call ratios hit extreme bullish readings on Monday and Tuesday, a rarity (chart). As Chris Prybal points out, put/call is now back at the same May/August level where SPX has subsequently fallen (chart). Similarly, AAII bullish sentiment is back near prior highs where, absent a recent long sell off, SPX has made little net progress (chart). The bull market is even on the cover of this week's Time magazine.
The market appears to be, in short, stuck in the late-stage rally dilemma: investors are very bullish, so each correction is short and shallow. And the lack of a more meaningful correction, one that shakes out longs and brings in fresh capital to fuel the next leg higher, leads to declining momentum.
The waning momentum is most evident on longer time frames. On the SPX weekly, the RSI (5) is making lower highs and lower lows without ever getting 'oversold' where the market resets and begins a successful leg higher (noted by green arrows). The shallow corrections (red arrows) have eventually failed each time.
In fact, 2013 is so far the first year since 1995 where the weekly RSI (5) has not become 'oversold' even once. Aside from that being 18 years ago, what is equally unusual is that in all the prior cases, the previous year has been a 'washout', either falling hard (like 1987) or trending sideways (chart). That type of action resets markets and establishes the base for the next sustained move higher. In comparison, the strength this year follows on the 13% gain made in 2012.
Waning momentum is also seen on the daily SPX chart. There have been 4 prior times since December where SPX has run higher at least 7 days in a row (like this week). In the following days/weeks, SPX has made minimal net progress (chart). Each of the prior times was a stair-step higher; this time, the rally overlaps with the one in July. In other words, a lot of energy was expended getting back to where SPX was two months ago. That is the very definition of waning momentum.
Finally, the loss of momentum is seen in breadth. Carl Futia shows that with indices challenging and/or exceeding prior highs, both cumulative advance/decline (chart) and net new highs (chart) are lagging. This implies that the rally is narrowing. Note that these divergences can persist for a time.
Nevertheless, the trend, as noted, is bullish, and with 2013 being such a strong year, underestimating this market has been an error.
But be aware that this rally to be getting tired. Two weeks ago we suggested that 2011 and 2013 are beginning to look very similar (post). If this is the case, then large cap stocks will form a slightly lower high in the weeks ahead with yet another lower weekly RSI (red arrow). The 2011 red arrow came during that summer's debt ceiling debate; ironically, we are now heading into another debt ceiling debate ahead of the October 15 deadline.
