Why I'm still bearish on the stock market

[BullBearGirl]

I received an investment newsletter in my email that I think would be of interest to the BB members, but I am unable to post it or its chart because the newsletter is copyrighted. I believe I can, however, summarize it for you:

There is a "very serious negative bearish divergence" between the Dow Industrials and the Value Line Index. The Value Line Index consists of over 2300 stocks. The VLI has not confirmed the new highs of the Dow. A chart beginning October 6 and ending November 13 compares the Dow to the VLI and shows that the Dow has gone up nearly 6%, while the Value Line Index change is 0%. The Dow and the Value Line Index lines rise and fall very much in conjunction with each other on the chart, except the VLI does not come close to the percentage increases of the Dow and its line has been consistently below the Dow's line since about October 23rd when the negative divergence started. The divergence has gradually increased to nearly 6% as of November 13 and appears to be widening still.

The article goes on to explain that "...divergences between these two indices have marked important turning points in the market in past years. This divergence, in my opinion, trumps the still bullish sentiment data and calls for a stock thrashing dead ahead."

(Quotes are from Jay Shartsis, options expert, Shartsis Options Alert, New York and were published in the November 16 issue of The Daily Reckoning newsletter.)

I will appreciate any commentary or opinions on this.

[BullBearGirl]

Thanks for pointing that out.

[Steven Vincent]

That's pretty much the same thing as the action in the RUT:INDU ratio that I have been blogging about.

We can see that pullbacks in the ratio have coincided with pullbacks in the SPX. When the ratio begins to turn up, as it is now, then the market rallies. The difference this time is that the ratio is turning up from a high in the market, now from a low, which is potentially very bullish.