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Below are two charts adding to the bearish case for the market.  These charts help show that market momentum has stalled.  The weekly MACD is generally a solid indicator when it crosses under from an extended level. 

You have to be at least a little nervous about this chart shown below.  The RSI crossed under the 70-level, the weekly MACD experienced a cross under from an extended level, and prices closed solidly under the 10-week for the first time since August 2006.

This was not a happy week for the bullish percents.  Last week's bullish percents are above and this week's are below.  The bulls can't be too encouraged by bullish percents showing this number of shifts lower without a single shift higher.  The only encouragement for the bulls is the number of bullish percents that held above the 70% level, and that the NYSE and Dow Industrials did not turn down.  The major industry groups are leading lower, while the broader sectors and major indexes linger at high levels.

Above is the absolute performance for the week of the major sectors, and below is the relative performance.  The strong areas were health care, which is probably a move to a defensive sector, and utilities, also defensive but probably oversold and benefiting from the recent small drop in long-term rates.  Energy and financials had been the stars in the spring.  Financials have been strongly out-of-favor for a number of weeks, but now energy may be also which is confirmed by the turn lower in the bullish percent.  Tech seems to be holding the market up which feels like a thin reed at the moment.  I like to see tech lead a market higher early in a cycle, but rotation into tech very late in this cycle seems like an attempt to find safe haven in an under-appreciated area.  Tech looks like the only option at the moment as the other areas have already run up and are experiencing distribution.

Below is a look at investor sentiment shown in a diagram of four investor surveys.  The newsletter writers, individual investors and bloggers have all now experienced a week of capitulation where they set their skepticism aside and went bullish just when the market was making a high that may have been an intermediate top.  Each of the equity surveys now shows a pullback from the bullishness as a result of choppy prices and the weakening breadth and technicals.  This is generally the kind of sentiment behavior seen at intermediate market peaks.  From a contrarian point of view, sentiment over the past few weeks has been bearish towards equities and supports the view that the market is experiencing a cycle peak.  However, the quick retreat of the individuals and bloggers from the overly bullish levels indicates that their bullish sentiment was not very solid and was likely a brief emotional response to being on the wrong side of a strong bull market.  For the bulls, this has to be encouraging and perhaps indicates that if the market is topping out, the pullback may be shallow.

The survey information above can be obtained for free via the following sites.  Investor's Intelligence is from Market Harmonics.  Individual Investors is from aaii.com.  Market Vane is from Investment Tools and Birinyi Bloggers is from Ticker Sense.

Regarding Market Vane, this is a survey of futures commodity advisors and is used by futures traders.  The publisher states that it is best used as an indication of the current short-term trend, with the idea that investments in futures should be in line with the trend.  So this survey has to be viewed separately from the others.  For additional information about market sentiment, I recommend a blog by Brent Leonard.

Sentiment analysis is an important component when following the markets, and is considered a “contrary” indicator.  Contrary because if too many people are bearish then there aren't enough sellers left, the balance tips to buyers, and the market starts to advance.  If too many people are bullish, most funds are already invested, the balance tips to sellers and the market weakens.  One way to determine if investors are bearish or bullish is by taking surveys and tracking at what levels these polls indicate investors are at the extremes of bearish or bullish sentiment.

Keep in mind, sentiment analysis is not a science and only provides very general information.  Sentiment is not a signal to take action, but provides background about the current state of the markets.  For instance, there have been many occasions when bullishness reached high levels well before the market started to weaken.

The market action Thursday was a bit confusing.  The new highs /new lows were healthy for both major indexes, reversing the recent pattern of weakness.  However, the bullish percent of the NASDAQ was down, and is now just above the all important 50% level even though it has been the stronger index lately.  The NYSE bullish percent was up a bit, and is maybe a reflection of its oversold condition.  Declan Fallond summed it up well when he said that Thursday's market was positive for stocks since they held onto Wednesday's gains.

Stocks are entering a favorable seasonal period. The last day of the month and the first two days of the new month are usually strong for the market, and July is usually a strong month for stocks.  However, since the 4th is on a Wednesday, many investors will be on vacation for the entire weak, so volume could be weak and it may be hard to assess the overall market for a while. 

I'm also a little confused regarding commodities because there is lots of weakness particularly in the precious metals.  Most of these commodities are just above their 40-week moving averages, and the CRB still hasn't broken out of its consolidation range that began in the spring of 2006.  I'm not sure what this weakness indicates so I'll just show the usual chart below and wait a few weeks to see how prices behave.

Gold is in a weak trend showing a series of lower lows, including a short-term trend line break. 

A couple weeks ago it looked like the CRB was going to break out being led higher by oil prices.  It seems odd to hope for higher commodity prices, but because we have been emerging from a period of economic weakness, the higher commodity prices were confirming the economic strength.  So the weakness in commodities is a little disappointing in terms of assessing the economy.  This weakness may be just temporary, so let's wait and see... another point, the RSI needs to break above the bear resistance level to re-establish the uptrend.

One last chart below.  Uranium has been weak after a strong run for a number of years.  The RSI is testing the bull support level, and prices are testing the uptrend line.  Breaks of these technical levels could indicate more weakness in uranium than just a pull back in the uptrend. 

As you probably know, the market was strong in the last hour of the day when the professionals swoop into an oversold market and make some short term profits.  Up until the last hour, the underlying distribution continued as market breadth deteriorated.  The NYSE new highs /new lows were weak again with 44 new highs and 121 new lows, which are not good numbers.

The longer term chart below gives the spike in new lows a better perspective.

The distribution seen in the spike in new lows was confirmed by the drop in the bullish percents.  

The Bullish Percent of the S&P 500 turned lower today, although it does remain above the 70-level.  A break below 70 will be another confirming sign that the trend has turned lower.

The former leader of the market this past spring was the energy sector, but it has now turned lower as Tech seems to have taken over the leader late in this intermediate cycle.

There isn't much doubt at this point that distribution is taking place behind the scenes in the stock market.  The chart below shows advance /declines for all the major exchanges have now broken below the lows of last March. 

Looking at advance /declines from a longer term perspective shows that the price highs have been well supported by the breadth of the market.  But now it looks like breadth has peaked along with prices and they are headed lower in a long awaited correction.

The bullish percents of the two major exchanges have ticked lower the last four sesssions and show a series of lower highs and lower lows.  The bullish percents have held up for quite a while, but now appear to be weakening with the market.

The Summation Index is nearing the zero-line cross-under that signals a price correction is underway.

The ratio of new lows over new highs is more evidence of a market undergoing behind the scenes distribution.

The dk report has another good wrap of the market.  He acknowledges the weak market but questions the selling volume and notes that the IBD stocks have not participated to the downside.  Good points for sure. 

What are the chances the 10Y rates will decline to challenge the up trend line at approximately 4.7%?  It is possible if the selloff in stocks gains momentum.  Plus, the sentiment towards bonds is so negative it works in favor of bond prices.

Enough about rates for now.  Yesterday there was a weekly MACD cross under from an extended level, and this is generally a reliable signal.

Below is a chart originally from Arthur Hill.  On Friday, the CCI broke under the 100 level which has been a decent warning of lower prices ahead.  For Arthur Hill, the more important level is the zero line, and a break under would indicate a market in a significant pullback such as last March.

My favorite breadth indicator is new highs /new lows.  I find this indicator more reliable than most of the others and there was another break below the zero level today for the NYSE.  The break earlier in June hinted at the current weakness in prices and today's break may be another confirmation that the trend is lower, at least of a while.

Stock market prices are unlikely to hold at current levels as long financials are crumbling underneath.   The financials bullish percent is confirming to the downside along with OBV volume.   Also, it looks like prices have closed below the 200 day moving average.

Barchart.com headline this morning: "China's Shanghai & Shenzhen 300 index today closed -4.3% after China's central bank chief Zhou Ziaochuan said that China's stock market may be overvalued and hinted at higher interest rates. The other Asian stock markets showed less severe declines".  I don't like the prospects for US equities if China corrects while US stocks are technically overbought and investors are focused on mortgage problems.

Changing topics, Bespoke has a good analysis of sector strength worth a look.  The dk-report has a very thorough weekend analysis of the market.  Also, NYSE short interest was reported last week at record highs which is the opposite of what is generally expected with a strong stock market.  Perhaps the current short interest is more a reflection of rate fears.  If anyone has any thoughts to share about the short interest, or any sites with worthwhile comments, please forward them to me.

The bank index looks weak and is a concern for the market.  The combination of higher rates and mortgage problems is killing this index.  Strong financials is generally important for a healthy uptrend in stocks.

Below is the broader weekly view.  There was a similar period of Bank weakness in late 2005, but the index retested the lows of its uptrend, and the index went from laggard to leader until early this year. 

NYSE short interest continues to reach record levels as investors continue to bet against the stock market.  Evaluated from a contrarian point of view, this is very bullish for the market.

Last week's bullish percents are above, and this week's are below.  Investors continue to sell REITs and the bullish percent shifted lower.   

Below is a stockcharts.com absolute performance chart showing every sector down for the week.  With so much weakness it is a little surprising there weren't more shifts in the bullish percents. 

Below is the same chart but showing relative instead of absolute performance.  The areas most sensitive to rising rates were worse off.