Breadth Divergence: A Wake-Up Call

By Lawrence G. McMillan

...As strong as breadth has been, “stocks only” cumulative breadth has not yet made a new all-time high.  Its all-time high was made in April 2015, and really even that wasn’t much of a new high.  The last time that “stocks only” cumulative breadth moved strongly to a new high was in July 2014.  I say the April 2015 high “wasn’t much of a new high” because it only exceeded the July 2014 high by about 1,900 issues – one strong up day in the market.  This failure of the “stocks only” cumulative breadth to make new highs remains a major negative divergence for the stock market.  I will tell you that most analysts don’t agree with me on this point – they point out that other breadth measures are at new all-time highs.  That only makes me feel stronger about the correctness of my position, for I know the history of the “stocks only” cumulative breadth line, and it is not to be trifled with.  Even so, this is not a sell signal per se.  It is only a warning.  Our feeling is that when such a divergence is in place, one should not ignore major sell signals (not that we intended to ignore any sell signals anyway, but often one is led into complacency by a long, monotonous bull market).  This negative divergence is your wake-up call to pay attention and to act when the time comes.  It may also be telling us that this move to new all-time highs by $SPX could be just one huge fakeout to get all the well-publicized shorts (Icahn, Soros, Gross, and on and on) to cover before the market turns downward again...

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