A few more ST warning signs

Markets managed to bounce back Friday making the Rydex traders correct for once buying the dip! Actually, this isn't the first time I noticed this happen. The same thing happened in late September when I was on my honeymoon. The market had rolled over, rydex traders bought the dip and the market snapped back a day or 2 later. It took a few days but eventually the market dropped a lot bigger on Oct 1 putting those Rydex dip buyers in the red. A similar thing may very well happen again because there are a few other ST concerns out there.

1) Although the index as measured by the SPX (as well other indices) is pretty much right at the 52 week high, the number of individual stocks within the index making 52 week highs is much lower than the last time the market was at these levels in October. This is a negative breadth divergence. Eventually though, this internal weakness tends to eventually translate into "external" weakness and the broad index level will follow suit to the downside.

2) The NASDAQ/NYSE volume ratio has spiked to 2.14 which is indicating greed as investors seek out the speculative NASDAQ names vs. the "safer" NYSE names. Although there has been the occasional false signal this indicator has been pretty reliable this year in forecasting ST weakness. Mind you, such weakness doesn't always happen the next day but typically it does within 7 trading days.

3) There was a spike in equity mutual fund inflows. Remember last week when I said there was a spike in equity mutual fund redemptions? Look what happened afterwards. These mutual fund investors are so lousy in their timing constantly getting out at ST bottoms and rushing back in at ST tops.


All of this bearish stuff I'm noting are ST concerns. And it should be noted that in a bull market, bearish signals usually don't have as much "bite" as bullish signals and the bear signals often take a lot more time than bullish signals to show results because in a bull market the long term trend is up and it's ultimate destiny to go higher, therefore, any bearish catalysts are "unnatural" to this trend and therefore tends to be resisted and muted. Whereas any bullish catalysts are in harmony with the long term trend and therefore yield results more instantly.

Despite the bearish signs I'm noting it's not a lay-up for the bears because as I've noted a couple days ago, sentiment is still pretty solid from an IT and LT perspective and like I said it can take a few days for ST bearish omens to yield results frustrating you and testing your patience..so don't be hero if you play the downside.