Weekend Review 04/13/12

One characteristic of US equities markets is that tops occur over time and due to the vicious nature of sell offs it's better to be in a risk reduction mode before the cascading of selling kicks in as participants capitulate. Tops also have a tendency of exhibiting a multitude of complex chart patterns such as rounded tops, head and shoulders, broadening top, diamonds etc... A combination of these factors amongst others makes pinpointing the apex of the top almost impossible.

The main focus of market breadth should not be to obsess and pinpoint the exact top, but to have a general understanding of the formation of topping action -signs and characteristics -then having a plan and risk profile to circumnavigate the churning waters. During these times capital preservation through money management and a focus upon reducing account draw down becomes imperative. Currently the market looks quite sickly from an overall breadth perspective and has been under duress since February.

For this weekends chart porn I thought I'd pan out a bit and address the move over the past two months as a breadth model for future reference.

$USHL5 04/13/12

$RUT to $NDX

$COMPQ 04/13/12

Primary Ratio Differential

Secondary Ratio Differential

10 Day Breadth Buying - Selling

10 Day Breadth Ratio

What begins to stand out is that breadth peaked in February and has shown signs of erosion since.  What also stands out is that the Russell was range bound during this period while the NDX continued 10% further.  This decoupling was noteworthy given that through the close of December there was a historical high in market correlation so this was clearly a divergence.  Additionally it's been two months of breadth deterioration and the Russell which moved the least during this period took the brunt of the damage while the NDX has pulled back the least.   

This week earnings begin to increase and expectations are low so there should be plenty of surprises.  Whether or not these individual stock catalyst will begin to stabilize the general market or whether or not macro factors will continue to influence a currently jittery market remain to be seen.  This may end up a "lost" earnings season with negligible impact upon the indexes.