Stock Market Observations for a Saturday

* Lack of Confidence Remains - Yields on 3 month commercial paper are down since August, but the ratio of yields on 3 month commercial paper to 3 month Treasury bills continues at historic highs. That ratio recently weighed in at 1.43. Going back to 1960 (N = 2499 trading weeks) the median ratio has been 1.098 and the standard deviation has been .08. So we're about four standard deviations above the norm. That tells us that confidence in commercial paper, due to continued subprime concerns, remains weak. Difficult to see how we'll turn around these skittish markets as long as that is the case. Interestingly, the most recent peaks in the ratio occurred in October, 1998 (1.308) and October, 1987 (1.432)--both scary market times but ultimately solid buying opportunities.

* Technical Strength by Sector - My measure of Technical Strength is a quantification of trending over the short-intermediate term. Here are the Technical Strength Index scores by sector for the major S&P 500 sectors:

Materials: -340
Industrials: -240
Consumer Discretionary: -200
Consumer Staples: +300
Energy: -60
Health Care: -120
Financial: -380
Technology: -220

You can see that there has been some use of the consumer staples issues as a safe haven, while formerly strong sectors (materials, technology) have weakened. The financial sector remains on its back despite Friday's bounce.

* Bear Market Benchmark - While stocks are weak, they're not at levels normally associated with bottoms at major bear markets when we look at the percentage of NYSE issues trading above their 200-day moving averages. At important bottoms in 1987, 1990, 1994, 1998, and 2002, we saw 20% or fewer NYSE issues above their 200-day MA. At present, we have 37% of NYSE issues trading above their long-term moving averages.

* Heavy Buying Days - If we look only at common stocks traded on the NYSE (to eliminate funds, preferred issues, and the like), we find that, on Friday, the ratio of up volume to down volume was over 13:1. That's the fifth highest reading in 2007. When we had a higher reading earlier in November, there was rapid follow through to the downside. At market bottoms in March and August, the heavy buying days were followed by further price strength--and more strong buying days. It's the follow through to heavy buying days that tells us whether we were seeing mere short covering or the start of longer-term buying by value-oriented market participants.

RELEVANT POSTS:

Herding Sentiment

Previous Reading of Technical Strength
.