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Diverging Breadth and Frothy Sentiment

Today’s selloff did not catch the Advance/Decline Line off
guard. As you can see in the chart above, as the S&P 500 and NASDAQ logged minor
new highs yesterday and DJIA did last Friday, market breadth has been
diverging. NYSE Composite and S&P 500 breadth have flat-lined over the past
week while Russell 2000 and NASDAQ breadth turned clearly lower. This indicates
a market running out of gas as advancing issues are unable to outpace decliners
and in the case of the NAS and R2K decliners have been beating out advancers
over the past week.

This bad breadth scenario comes at the outset of the
seasonally weakest time of the year from mid-July through October – AKA the “Worst
Four Months.” In addition, bullish sentiment had reached dangerous levels in
the face of a dearth of bears. The chart below courtesy of the venerable Investors
Intelligence U.S. Advisors Sentiment Report

shows the difference of the Bullish Advisors % less the Bearish Advisors %.
When this gets above 40 it’s a warning sign and with 60.8% Bulls and 15.5%
bears the difference is now 45.3%.

The weekly CBOE Equity-Only Put/Call ratio tracked in Barron’s “Market Lab that we have followed for
years, has also reached extremely complacent levels lately. Put/Call retreated from
the modest fear level of 0.59 at the May lows back down to 0.41 the first two
weeks of June and logging 0.43 and 0.44 the past two weeks. We have been
getting defensive and in a neutral posture since our April 22 Best Six
Months Seasonal MACD Sell Signal
for S&P 500 and DJIA and have been
preparing for our MACD
Sell Signal for NASDAQ’s Best 8 Months
which appears imminent.

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