I’m starting to see signs that market participants are abandoning their losers and pressing their shorts. When this occurs near all time highs it often means some pain is ahead for the major indexes. Here are some charts that serve as examples.

First is NYSE New Highs / Lows. New lows have now risen above the point when the S&P 500 Index (SPX) was making lows in early July and last December. This indicates market participants aren’t bottom fishing. Instead, they’re abandoning positions that are causing too much pain. Another point of interest in this chart is that NYSE didn’t recover much from both June and July lows. This type of divergence from SPX is troubling. The Russell 2000 Index (RUT) and Dow Jones Industrial Index (DJIA) are also showing negative divergences from SPX.

Next is a chart that compares a short of the S&P 500 Index (SH) and an actively managed bear fund (HDGE). SH has fallen to new lows while HDGE is holding up. This indicates that traders are pressing their shorts…near all time highs. It is another sign of a thinning market.

The percent of SPX stocks that are above their 200 day moving average is falling hard this week with the market only down slightly. They rallied back to the 60% level and then turned over. Long time readers know that I use the 60% level as a warning that the odds have increased for a decline larger than 60%.

What I’m seeing in individual charts are a lot of stocks that fell below their 200 dma on the last dip. Then subsequently rallied back above as SPX got close to all time highs. Now a slight move down in price has dragged them back below. 3M (MMM) is a good example.

As the market continues to thin I’m seeing the same stocks showing up in the most bullish stocks on Twitter every day. These few stocks are holding up the indexes while nearly half the stocks in the market are in clear bear trends (or at least testing their 200 dma). If these stocks start to fall it will be a big red flag. The list below was from last week. You can use this link to see the current daily list.

Our last sign that the weak stocks are being abandoned comes from the number of bearish stocks on Twitter. They are approaching the count made at the January lows in SPX. There are more of them than at the October lows. This is an unusual situation occurring near all time highs for SPX.

Here’s a list of bearish stocks over the past month. You can see the full list of bearish stocks on Twitter here.

Conclusion

The bottom is falling out of the market. The weakest stocks are being sold en masse and many stocks are turning from bullish trends to bearish. A limited number of large cap stocks are holding up the indexes. If you own individual stocks you’re probably already feeling the pain. If you own index funds you’ll want to watch the most bullish stocks closely. If they start to fail the indexes will most likely follow.

One note about the current portfolio allocations. As of this post my measures of the economy have fallen back below the zero line. That puts trend, risk, and the economy in negative territory. If this condition persists into Friday afternoon the core portfolios will raise more cash or add a larger hedge. The volatility hedged portfolio isn’t affected by the core health indicators so it will likely stay 100% long. As always, let your personal risk tolerance and read of the market be your guide in your own hedging.