Bernanke is Clear on Triggers for QE3, and We Aren’t Close to Them

Author Larry Berman

Posted: 26 Mar 2012 reposted from etfcm

This week’s educational segment on BNN’s Berman’s Call is focused on understanding some aspects of market breadth. For the car enthusiasts out there (I just got my new Audi A5 cabriolet), understanding market breadth is like looking under the hood to get a sense of what might go wrong in the future. Looking at all the gunk in the carburetor for example can tell you about the efficiency of your engine. In the case of a stock market index like the S&P 500 or NASDAQ 100, we can look under the hood in many ways.

One that was developed by our good friend Tom McClellan of the McClellan Oscillator,, averages the amount that all stocks in an index are below their 52-week highs. The NASDAQ 100 as all will know, led by AAPL and a hand full of other stocks, has been making new highs, but the average stock in the index is still more than 10% below its own 52 week high. We can see that when divergence build in this indicator, as we have seen over the past market cycles, a significant market correction typically follows.

The current internal weakness in the NASDAQ 100 is the worst in years. There are other divergences popping up all over the place like IWO (US small cap stocks), underperforming large caps (SPY), and the DJ Transports (IYT) not confirming the new high in the DJ Industrials (DIA). The fact that sentiment readings are bullish and hedge fund investors have been chasing performance most of the year suggests we are likely getting very close to an important trading top.


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