Stock market ‘classic topping formation’ showing up in charts

Gluskin
Sheff

• A potential “double top” is forming in the S&P 500,
  according to Gluskin Sheff Chief Economist and
  Strategist David Rosenberg. 
• At the same time, volume and stock-market breadth are
  declining.
• That pattern has shown up in every topping process over
  the past five decades. 

Signs of a stock-market meltdown keep piling up, and now it’s
time to add a “classic topping formation” that has shown up in
the charts, according to Gluskin Sheff Chief Economist and
Strategist David Rosenberg. 

In a chartbook sent out to clients on Tuesday, Rosenberg makes
note of the “double top” that appears to be taking shape in the
S&P 500. Such a formation can occur when there are two
consecutive peaks in price, and can signal a trend reversal is
about to take place. 

“It’s important because every topping process in the market for
the past five decades featured a second high that was met with
poorer volume and breadth than the first test,” he told Business
Insider by email. 

And that is exactly what we see right now. As the chart below
shows, S&P 500 volume has tapered off as the benchmark index
made new highs at the end of August. This shows traders are
buying stocks with less conviction now than they were back in
January — in the aftermath of President Donald Trump passing the

biggest tax cuts in a generation.

Business
Insider/Andy Kiersz, data from Bloomberg

Additionally, stock-market breadth, or the comparison of the
number of stocks advancing versus those declining, is also
waning, and has Wall Street strategists concerned.

Earlier in September, Bank of America Merrill Lynch’s Mike Wilson
said that while one key measure of breadth — the share of
New York Stock Exchange-listed companies advancing versus those
declining — hit a new high in August,
a number of other measures are worse. And that’s a big
part of the reason he has been warning all year that
stocks are in a rolling, drawn-out bear market.

“Specifically the % of stocks making new highs, the % of
stocks above their 200-day moving average, the performance of
equal weighted indices versus their market cap weighted sidekicks
at both the broad index level and sector level are all showing
signs of deteriorating breadth,” Wilson said.

And while a potential “double top” pattern with declining volume
and breadth may not on its own be enough to derail the
longest bull market in history, it’s another checkmark on the
list of things traders should be worried about.