Stock Market Exhaustion Indicators

The Wilshire 5000 Total Market Index’s percent change from a year ago has been a good forward looking indicator for the index since the 1990s. Whenever the Wilshire 5000’s percent change from a year ago started to plunge and diverge with the Wilshire 5000 Index, it ended up being a severe warning signal for the stock market. And when the Wilshire 5000's YoY percent change fell below zero and made a new cycle low, it was confirmation that a new bear market had already begun. Right now, the Stock Market Exhaustion Indicator is diverging with the Wilshire 5000 Total Market Index and trending down, so watch it closely going forward. I think the indicator may be repeating its 2007 pattern, when it exhausted to the upside for the second and final time in a mature bull market.



Next, I broke out the Wilshire 5000's percent change from a year ago by market cap. As you can see, the smaller the market cap, the steeper the divergence right now, which of course is due to the beta/risk differential. Before the Wilshire US Micro-Cap Total Market Index corrected, it was significantly outperforming the Wilshire 5000 year-over-year. Basically, what’s going on is riskier micro-cap stocks are starting to underperform healthier large-cap stocks in the Wilshire 5000 Index. For example, since the beginning of March, the Wilshire US Large-Cap Index has been making higher highs, while the Wilshire US Micro-Cap Index has been making lower highs (see the last static chart on this post).



The Wilshire US Micro-Cap Total Market Index's YoY percent change gets its own chart because it is the riskiest division of the Wilshire 5000 and the most extreme exhaustion indicator. I think the steep divergence between the Wilshire 5000 and the Wilshire US Micro-Cap's YoY percent change is a warning sign for the overall market right now.



(The FRED charts were reformatted on 11/17/2016.)

Major price divergences between the Wilshire micro-cap, small-cap and large-cap indexes predicted the 2000 and 2007 bear markets, and a similar pattern may be repeating itself in 2014.

Source: St. Louis Fed (FRED), Wilshire Associates

Source: St. Louis Fed (FRED), Wilshire Associates

Look at the massive divergence between micro-caps and large-caps right now (red vs. blue). The small-cap index (green) hasn't officially made a lower high yet on a multi-month basis, but it looks like it's starting to diverge with the large-cap index on a multi-week basis. In 2007, the micro-cap and small-cap indexes started to diverge with the large-cap index (made lower highs vs. higher highs) at the same time. So I think the current divergences are just in their preliminary stages. Either way, after looking at year-over-year growth rates (exhaustion) and price divergences, the stock market is currently exhausted and vulnerable to a major correction (and possibly a new bear market).


Related posts on Dvolatility Research:
*RUI, RUT and IJE Exhaustion Analysis, Rate-of-Change vs. Price (Part 4)
*Russell Index Analysis: IJE vs. RUI and RUT, Technical, Divergence and Correlation Analysis (Part 3)

Related posts on DistressedVolatility.com:
*S&P 500 and Federal Reserve in 2014 vs. 2007 ($SPX)