Market Internals Weaken

Despite the continued uptrend in equities since early July, market internals have weakened as the rally becomes more selective and cautious.

A negative divergence has surfaced in reviewing the advance/decline ratio of NYA and the Nasdaq, as the solid advance in equities has been met with a flattening of the advance/decline ratio. We saw this negative divergence develop while the market rallied from March through the end of April (so this negative divergence can be with us for a while). Also, NYMO (NYSE McClellan Oscillator) has deflected from overbought territory, and it has recently crossed below its EMA 20.

Financials relative strength has weakened against the broader SPX.  Rates have fallen while Treasuries surge, as an aire of risk-aversion returns to the market environment. It is interesting to note that recent CRB strength has deflected from resistance near 280 as RSI corrects from above 70. Small Caps have been consolidating relative to Large Caps, further reinforcing the aversion to risk (and possibly a flight to export-intensive large caps as the dollar weakens).

There is nothing compelling to convince us to take significant long positions as this rally ages. We will tighten stops on longs and take select profits. Edging into counter-trend (short) positions and protecting longs with index puts are favored, as our market perspective remains neutral (with a bias toward negative).

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