The individual stocks of the equities market are no longer keeping pace with the broad averages. A vast number of these stocks have faltered because the trend itself has become ever more selective. What initially started as a robust, broad based rally is now narrow; and can only be supported by a handful of stocks.

The S&P 500, which is greatly exaggerated from its components, and perhaps can push a bit higher, is experiencing its very own reading of 'number of new highs' increasingly diminish. This particular statistic is useful during an uptrend because it determines strength, participation rate, and only the initial spotting of a divergence reveals that trouble is brewing.

The reversal however will not come immediately. The trend matures, and its remaining strength allows price to carry on. The divergence that was previously recognized is now deeply engraved and building on all fronts. More and more stocks will be left behind and the few that thrive will become stretched even further. All decisions, rational decisions will be overcome by greed and investors will pile in to chase the last bit of euphoria.

But ultimately what lies ahead is a dead end, where the climate becomes treacherous. A terrifying, trendless market at formidable resistance begins to emerge. The trend is immobilized and prices then shape into one large distribution top. Then, after enough time sets in, the shaky pattern cracks, the market reverses, and like a flood in destruction, it drags everything in its path!

It's the beginning of the end, and the stock market ends up fighting a cyclical clock of nature. At every climax, prices are deprived of oxygen and must retrace their journey to lower altitudes. This most recent sideways pattern of heightened volatility, represents a saturated state of exhaustion, which calls for a major topping process that will inevitably fall apart!

S&P 500 v. Number of New Highs

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