Many an internet Guru has lost their Guru status on calling for falls this year and been given the cucumber rumba as the indexes continued on a relentless climb. But is this rally finally losing momentum? We will be down today but will this develop into something more? I actually think we have chance here to see a deeper fall than we have had on previous pull backs. Have a look at the chart below of the 10 day average of the advancing stock minus the declining stocks. This chart gave me a good heads up of the end of the bull run back in December 07. The problem with the Indexes as an indicator of market strength is that a few big caps can hide the underlying weakness in the broader market. Just like we got back in 07.
The blue lines are the points where we have had divergence from the broad market index this year and what great signals again they were. The first one was a ripper. As we were making possible generational lows the downward momentum had well and truly come out of most stocks months before the low was reached on the index. Then we got some significant divergence on each push up to new monthly highs in May and June signaling the 8% fall we had in late June. Now we are at a similar point in October where the index has made new yearly highs yet the adv-dec has made 2 lower highs. These are signals of weakness in the broader market. The money isn't chasing higher prices here. A decent pull back would actually be healthy.
If we get a good pull back the bounce from any such fall will tell us a lot about the health of the market for the next medium period. If you're a Bull you would be looking for something like I have marked on the chart below of the same 10 day Adv-Dec (red) and the XAO (blue).