Most volume analysis is confirming the S&P 500’s bullish trend except for one bearish signal which has been triggered for the first time since 2007, according to Buff Dormeier, Chief Technical Analyst at Kingsview Investment Management.
Dormeier says the most important of his leading indicators is his proprietary Capital Weighted Volume flows. Looking at Chart 1, he notes capital money flows are moving in sync with the market rise, thus confirming the market’s upward trend.
Three other market breadth indicators are shown in Chart 2:
1. The “% of Stocks @ New Highs”, which has since recovered from breaking beneath trend. Now that it has risen above trend, it once again confirms price (top panel)
2. The Advance-Decline line, which continues to lead the market higher (middle panel).
3. The “% of Stocks Above Trend”, which is actually losing ground. So although the market is trending ever higher, fewer stock components are trading above their own individual trends, suggesting caution. That stated, the number of stocks above trend still resides above its own trendline, thereby keeping it neutral…but worth closely watching.
Thus, all of his traditional leading indicators are either neutral, confirming or leading price movements.
Chart 3 looks at the “% Change in Margin Debt”. The percentage change in margin debt is calculated by comparing today’s margin debt versus one year ago. Dormeier points out that margin debt is a contrarian sentiment indicator warning of potential tops in the market, as evidenced by investors heavily borrowing against their investment portfolios. According to Investor Business Daily, a 55% year-on-year year rise in margin debt is “a flag to a major top” and this has only happened three times since the 1970s. The year-on-year change in margin debt is currently 73%. This indicator has not flashed a warning signal since mid-2007.
Dormeier warns, however, that extremes in sentiment indicators typically extend for some time before the market actually responds and thus thinks this is something to watch but not act upon until capital flow trends reverse.