The following is an excerpt from the November 15, 2013 blog for Decision Point subscribers.
One of our proprietary indicators is the Percent Buy Index (PBI), which shows the percentage of stocks in the S&P 500 Index that are on intermediate-term buy signals.
Currently the PBI has a strong reading of 85.6, which is more than enough to justify the new highs being set by the market. The only problem is that the PBI has set a series of lower tops, which is a negative divergence compared to the series of rising price tops. This shows that fewer stocks are participating in the market rally, and that could be a problem. Nevertheless, there are a high number of stocks participating, and we would not consider the negative divergence to be an automatic sell signals, considering the price strength being demonstrated — just a warning that things could be better internally.
The period when the 2000 bull market top was being put in shows how seriously out of balance the PBI can get. What happened was that market participants had narrowed their focus to primarily large-cap stocks, and they were the reason that the broad market indexes were held aloft.
[Hear More: David Nicoski: It’s a Teflon Market - No Significant Corrections Ahead]
While the current PBI reading is strong, the downside is that it is at a level where a price top could materialize. This is exacerbated by the negative divergence. Note historically that PBI tops have been accompanied by price tops. It doesn't have to be a major top, but some corrective action is likely.
Technical analysis is a windsock, not a crystal ball.
