(This is an excerpt from recent blogs for Decision Point subscribers.)
This week our Percent Buy Index (PBI) for the S&P 500 dropped below its 32-EMA and generated a sell signal. The PBI tracks the percentage of stocks in a given index that are on intermediate-term buy signals, and it is one of many indicators that we follow. The PBI does not currently affect our primary timing model (which is still on a buy signal), but it does offer an early warning of possible problems ahead.
The chart below shows the SPX PBI over a three-year period. Obviously, its crossover signals are not infallible, but downside crossovers at overbought levels are generally bad news. Additionally, notice the negative divergence -- lower PBI tops against higher price tops.
For the Nasdaq 100 Index, the PBI sell signal was generated over two weeks ago, and the negative divergence is much more severe. This reflects that the smaller-cap stocks in the index are fading and that larger-cap stocks are holding the index aloft. This is not a good thing, but it can persist longer than we might think.
It is possible that prices will behave indecisively (move sideways) until after the election, but the PBIs are giving signs that, no matter who wins, the market is likely to head lower.
Technical analysis is a windsock, not a crystal ball.
