Thursday, April 3, 2008
Market Breadth Divergence
by David Yu
Whatever the payroll number may be tomorrow, moving forward there's a few late technical development that concerned me. One of which is the volatility, and I'm not talking about the stock price fluctuation or the near-term and next-term option price based VIX Index. I'm talking about the volatile undercurrent of the market, market breadth volatility, that's happening right now. It had recently shot up to an unprecedented level (red arrows on Chart1 below) even though the market had made marked improvement of late.
My proprietary CMB (Composite Market Breadth) Volatility Index measures dispersion of market breadth data. The farther the data stray from the mean, the higher the volatility. To me, market breadth volatility is the REAL volatility because that's the undercurrent that moves the ocean. It's not the option traders opinion (VIX) or the price fluctuation (Bollinger Band Width) that merely scratched the surface. And, you won't see this real volatility measure anywhere but here. That feels pretty good touting my own horn, but, hey, this is my website. Seriously, rising CMB Volatility Index had been closely correlated with falling price because Mr. Market dislikes volatility.
Every CMB Volatility peak on Chart 1 correlates with market bottom in the lower pane (blue circles). And, one reason the market continued to trend lower since mid December is because the CMB Volatility had never declined below 0.40 (blue rectangular). Now that the CMB Volatility has surged past all the previous highs and continued to sustain at this level is a cause for concern. The market will not advance in earnest until this volatility index begins to decline in earnest. I know both the VIX and the price volatility have been declining, but one is merely the option traders' opinion and the other is an afterthought. Market breadth movement always precedes price movement.
Chart 1
Another concern I have is the intraday market breadth differential. Chart 2 below shows that the Nasdaq had edged higher than Feb. 5 intraday high and somehow (short of 0.88 points) bridged the gap between Feb. 4 and Feb. 5, while Chart 3 shows that market breadth had been going in the opposite direction.
Chart 2
Gray arrow on Chart 3 below plots the decaying of the Nasdaq intraday market breadth since February 5.
Chart 3
My Intraday Market Breadth Performance Index measures differential intraday breadth performance. And, the decline of this indicator tells me that the market has been growing relatively weaker in late trading sessions.
O.K. I'll have to come back on Friday to finish this up. It's getting real late, and I'm already all worn out.
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Friday, 4/4/2008, 5:00 pm EDT --- Now, let's get this update completed so that I can take the weekend off.
I was hoping that I could finish this in the morning as I had expected today, Friday, to be another low volume boring session, notwithstanding the payroll report. By now, I believe everyone's expecting job loss to continue anyway. And, the market should've fully discounted that already. As long as the loss was not 200,000 or something surprising like that, I didn't expect the market to make any trend changing move.
I was right about the low volume, and the market did end up pretty much where it had started. However, I was feeling a bit disconcerted when the Nasdaq 100 made a fresh new high (since January 17) in the early afternoon session. I got busy real quick and wrote (sold) a few calls to protect my long positions. You receive higher premium on call options when the underlying share price is higher. Anyway, I would've felt a lot more at ease had the market pulled back a little more today to resolve some of the statistical variances, or technical divergences. Instead, all broad-based market indices advanced, albeit small. And that only created more technical issues to be resolved.
One new technical issue worth noting today is that, based on my own search criteria, there were no stocks gaped up throughout the day, not even when the Nasdaq 100 advanced 2% from the intraday low to the aforementioned new high. This is significant because it only happened 3 times in the last 12 months. Not one single stock gaped up on 8/15/2007, 10/4/2007, and 1/22/2008 (see Chart 4 below), again, based on my own search criteria. And, as you may've noticed, each occurrence took place at a critical turning point of the market. Today may also turn out to be just as critical.
Chart 4
There are several of these statistical variances developed over the last 5-6 trading sessions on my watch list. And, the list grew a little longer everyday the price disagrees with the breadth.
That's all folks! I won't be around this weekend to write anything. Have a stress-free weekend my beloved readers!!!
email: dyuguard-2@yahoo.com