Wednesday, June 14, 2006

Market Update

Per the previous update, it's clear why it's important to monitor the strength/weakness of the market during declines such as the one we've been having. If you research price declines alone, you'll come to the conclusion that the market's outlook is bullish following a sharp decline. If, however, you examine the momentum of the decline and the degree to which the broad list of stocks is participating in the decline, another set of conclusions comes to the fore. Short-term market outcomes are not bullish during declines in which an expanding proportion of stocks participates to the downside.

And that is what we've been seeing. On Tuesday, we saw an expanding number of stocks making fresh lows: 222 new 20-day highs against 3146 new lows. Although we did not see an expanding set of new 52-week lows in the SPX stocks, such an expansion was clear in the broad market--and especially among small caps.

We *are* nearing a juncture from which rallies have tended to occur. After Tuesday, only about 18% of SPX stocks are trading above their 52-week moving averages.

Still, this market is all about unwinding the speculative trade that came from easy money. As long as we see the weakness in gold and in emerging markets, this theme holds sway and will influence the broad list of stocks. In spite of violent short-covering rallies, it will take price declines with *fewer* stocks participating to the downside to get me to entertain the bullish side.


baifriend said...

hi, Dr. Brett, very good work to predict where is not the bottom.

Brett Steenbarger, Ph.D. said...

Thanks. A very worthwhile exercise is to take a handful of important indicators (advance-decline, TRIN, VIX, volume, etc) and trace how each has behaved during market corrections of 10% or more. Important patterns become evident that you don't see during normal price action.


david dubois, phd said...

Beautifully written article--I really enjoy seeing scientific work on expertise so practically and clearly applied. Do you have any writings or technical tools applicable to commodity trading?

Brett Steenbarger, Ph.D. said...


Thanks for your note. A number of free articles are posted to my personal site (; the Weblog on that site also follows several technical tools.