What we’ve been seeing over recent weeks is the slow, tedious process of distribution. It’s been happening under the subtle cover-up of a steadily rising Dow. Classically, when the stock market is in the process of topping out, the last group to decline is the blue-chip group that we call the Dow.
The chart I highlight below is very sensitive. It shows the percentage of NYSE stocks that are trading above their 50-day moving averages. Why do I call this a “sensitive” chart? I call it sensitive because I could use a 150-day moving average or a 200-day moving average, but a 50-day MA is particularly sensitive.
So studying this chart we see that since late-February fewer and fewer NYSE stocks are holding above their short-term 50-day moving average. The usual result is that at some point the growing number of sinking stocks will pull down the Dow. But at that time, when the Dow finally begins to slide, so many stocks will be in negative territory, that those who decide to exit the stock market will discover that they are already holding a stock portfolio that is already riddled with losses.
For confirmation of the above, I usually turn to the new high-low index, which shows the new highs minus the new lows. The chart below shows that the peak of strength occurred back in December with the index at around 400. A second but lower peak occurred in late-February with the index at 346. Deterioration and the latest peak took place in March with the index at 250.
I am now watching the March low for the index at 48.00. The deterioration in this index is now so flagrant that I believe it will start to “rub off” on the Dow.
