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The relationship of Homebuilders, another interest-sensitive sector, is shown in Chart 17 along with the S&P Composite. In most situations, the S&P Homebuilders peak well ahead of the S&P. Chart 18 shows this relationship back to its inception in 1966 as well as introducing the relationship’s relative action.

An additional warning to the market, in general, is shown in Chart 18, when the Homebuilders coincide or lag the S&P, the RS line typically has a sharp sell off. In the current situation, the Homebuilders have not only completed a top, and decisively violated a major up trendline, but the sharply falling RS line is below its 18-month MA. This relationship doesn’t tell us the S&P is about to decline but, like the utility divergence, warns us that the market is now extremely vulnerable. Consequently, when the S&P violates its 12-month MA, the weakness in these two indicators will be confirmed.

Chart 17. Vertical lines show S&P primary trend peaks.

Finally, market peaks are often preceded by weakness in the breadth data along with numerous other negative divergences. The April peak did experience some small-time divergences with the NYSE A/D Line, but nothing of primary trend significance. However, Chart 19 does show there were numerous negative divergences (flagged by the red arrows) between the S&P, Short-term KST, 39-week ROC, and the NYSE NYSE Net New Highs. Notice the final rally at F was extremely weak for the KST. This means when the S&P confirms with a break below the trendline and 65-week EMA, a sharp decline is likely to follow. In mid-June 2006, the line and the 65-week EMA were around 1245.

Chart 18. Vertical lines show S&P peaks.

Chart 19.

Summary – 

1. Secular trends in equity prices are determined by multi-decade swings in sentiment, as investors move from a generational swing in pessimism to the overconfident and “irrational exuberance” at peaks. 
2. History tells us that once an extreme in optimism has been reached, it takes a very long time, decades, in fact, for the pendulum to move to the other extreme. 
3. Our indicators advocate that a secular peak was seen in the year 2000. 
4. These types of secular market turning points have always been followed by massive bear markets like the one that developed in 1929, or multi-year trading ranges as witnessed in the 1900/21 and 1966/81 periods. 
5. Without exception, stock prices, when adjusted for inflation, experienced a significant loss in purchasing power following previous long-term tops.