Short-term Outlook:  25% Bearish  As of Jan 12, 1134 SPX

Equity Indicators - Updates and Extremes

Market Top Conditions

There was an article posted to CBS Marketwatch yesterday that generated a lot of questions.  The gist of it was that markets don't top when the number of stocks hitting new 52-week highs is robust; we're currently seeing many new highs, therefore we're not at a market top.

We've discussed this type of thing many times over the years, and there's certainly truth to it.  When we get this kind of momentum and breadth, then we typically don't enter a deep and prolonged decline immediately.  Short- to intermediate-term corrections are normal, but a new bear market for example would be out of the norm.

To further the idea, let's take a look at the table below (you'll have to click the link to open up a larger version).  What the table shows is each six-month peak in the S&P 500 since late 1939 to the present, and a sampling of various economic, monetary, breadth and sentiment conditions at the time.  Also shown are our current conditions and whether they suggest we're at a peak.

Click table for larger view

Bottom line, does this suggest we're at a major peak?  Not really.

Out of the 14 conditions that gave a clear bias for a top, we currently only meet 5 of them.  Here are the reasons why they suggest that we're not at a top:

*  Consumer confidence is too low, and is at its highest point in a year.

*  The Federal Funds rate is exceptionally low.

*  The P/E Ratio of the DJIA is about average, though the Dividend Yield is well below average (that's bad).

*  The percentage of stocks at a new high are well above average (only one top was formed with this many new highs).

*  There is currently no divergences between the Dow Jones Industrials and Transports.

*  The Investor's Intelligence Bull Ratio is very high (that's bad), but still at its most optimistic level in a year (as of last week).

*  Mutual fund cash levels are exceptionally low (that's bad), but when we top we have usually seen managers start to raise cash already.

*  Short interest on the NYSE is very low (that's bad), but like the prior two conditions, we usually see sentiment turning by the time the market peaks.

While many of the studies and indicators we've looked at over the past couple of weeks suggest more weakness than strength ahead, they are for the short- to intermediate-term.  Longer-term, we don't have many of the conditions for a major reversal yet.