I’ve stated several times over the past year that breadth must deteriorate for the market to fall substantially. In mid July I pointed out the weakness in the ratio between the S&P 500 index   (SPX) and SPX equal weighted (SPXEW). When it falls below its 20 week moving average it is often a sign of choppy markets to come. The market rallied after SPXEW’s initial failure, but during that rally SPXEW only made it back to the underside of its 20 week moving average then turned back over again taking the market with it.

This is a great example of how tops are a process, not a single event. I’m not suggesting that we’ve seen the top, but wanted to point out how much time it takes for one indicator after another to weaken, then fail, before a top is actually in place. Tops usually take several months and are often fraught with whipsaws in our indicators (and portfolio allocations) before the weight of selling causes a severe down turn. I can’t see the future so I never know if the weakness will accelerate or not. As a result, I simply hedge when conditions get to a point that have in the past had high odds of being the tipping point where a market changes from bullish to bearish. The idea is to hedge when the odds are high a correction is starting.

Last week two of our core market health categories were negative. Today our measures of strength are below zero as well. However, you should know by now that I wait until a weekly signal to make portfolio changes (to avoid whipsaws). The market is bouncing sharply so this condition could clear before Friday.

Here are a few more things that are close to the edge and have been moving back and forth from clear to warning. Keep an eye on them for more signs of a top.

I use a weekly close below 60% for the percent of stocks in the S&P 500 index above their 200 day moving average as a warning.

60% is also my warning level for the bullish percent index (BPSPX).

The cumulative weekly NYSE advance / decline line (NYAD) is close to painting a lower low that will be another domino to fall.

I did a post at Trade Followers that should still give the bulls hope. The one thing the bulls still have in their corner is the performance of technology, health care, and financials.