How could the market be making new all-time highs when two of the largest industries continued to struggle and are now down significantly from their price highs?
If you follow our work you no doubt know that breadth, a measurement of the market’s upside participation, has been declining even as the Dow and S&P 500 made new all-time highs.
On Friday, September 19, the S&P reached another new all-time high at $2,019.
On that same day, out of the 500 S&P stocks, only 89 of them also made new 52-week highs, which means on a day of new all time highs, less than 18% of S&P stocks also participated with new highs.
This shows weakness in the uptrend and is a common occurrence during topping processes as fewer and fewer companies are left to take the markets higher.
Fool Me Once, Shame on Me
Two of the largest industries in America, housing, as tracked by the SPDR S&P Homebuilders ETF (XHB), and energy, as tracked by Energy Select Sector SPDR ETF (XLE), are confirming the decline in breadth as owners of companies in those sectors have felt some major pain lately.
Check out the first chart below of the energy sector index. Shares in the average energy company are already down over 10% since June, with price now below the 200 day moving average.
Energy makes up an estimated 10% of U.S. gross domestic product and this chart warns all is not well within the energy sector as those companies help lead the market to the downside.
Why is everyone focused on new all time highs in the S&P but not seeing the major underlying problems?
Maybe they have just overlooked the fact energy stocks, as tracked by the Rydex S&P Equal Weight Energy ETF (RYE), are struggling.
Fool Me Twice? I Don’t Think So.
Based on the National Association of Home Builders, housing’s contribution is an even greater 18% of GDP, and based on recent media reports it seems housing is in a full blown recovery as home builder confidence just hit a nine-year high.
Although the mainstream media seems to think all is well with the housing recovery, we, who would rather rely on the market data than biased media outlets to tell us what is really going on, know that simply is not the case.
First off, check out the two year chart below of the homebuilders index. Does this look bullish to you? Not to me as homebuilder stocks actually peaked back in May of 2013, declined over 30% through last summer and remain down over 20% from that peak today. The individual charts of companies such as KB, DR Horton, and Lumber Liquidators look similar, or even worse.
Now, check out the following chart displaying how we’ve been bearish on homebuilder and construction companies.
Historically there is a very high correlation between new home starts and homebuilder stocks as the chart below shows. Notice how the two lines (housing market share prices in blue and housing starts in red) typically rise and fall together?.
Look at what has occurred since 2011. Housing stocks have rallied much higher than housing starts have risen., which shows share prices have likely risen much farther than they should have, leaving over 30% of risk based on housing starts alone.
Not only have two of the major industry sectors in the U.S. topped, they are showing relative weakness as the S&P reaches new highs.
A market divided is not a strong market, and housing and energy show this market is extremely divided with housing already in a bear market and energy stocks quickly moving that way.
Our Technical Forecast follows the market’s sectors to help our subscribers stay ahead of the major trends. Market breadth continues to deteriorate, something that occurs at market tops, not at market bottoms.
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