Sunday, April 06, 2008

Indicator Review for April 7th

Since bottoming on March 10th, buying interest in stocks has remained quite high, as we can see from the chart of the Cumulative Adjusted NYSE TICK above. I had noted in last week's review that money flows were not impressive despite the rally off the price lows. This changed with Tuesday's rally, which brought significant buying across a broad range of stocks. By Wednesday, we had 455 NYSE, NASDAQ, and ASE issues making fresh 65-day highs, the highest level of 2008. Moreover, the stocks in my basket of S&P 500 issues, which are evenly divided among eight sectors, moved solidly into uptrends, as noted by my Twitter posts this past week. The charts from my Friday post show how we made a double bottom in the major averages with an important non-confirmation from the new 52-week lows. That has been followed by a pickup in the proportion of stocks trading above their moving averages, as well as by the expansion in the number of stocks making new highs.

Does this mean that we've finished a bear market and are now in bull mode? Not necessarily. The 1400 region in the S&P 500 Index represents important resistance, and--as noted recently--we're quite overbought. The Advance-Decline lines for the NYSE common stocks and S&P 500 issues do not look healthy; they've budged only moderately from their bear lows. Yield spreads--corporate and municipal vs. Treasuries, for example--and interbank loan rates still suggest a healthy measure of risk aversion.

Still, I have to go with the indicators and, for now, they're suggesting that we've put in a double bottom and should enjoy an intermediate-term advance. My expectation is that this should take us above the 1400 resistance and flush out the bears. What would change my mind from this scenario would be reversals of the dynamics we're currently seeing in NYSE TICK, money flows, and the expansion of stocks making new highs. Particularly worrisome would be an expansion in the number of stocks making fresh 20-day lows. If we're to enjoy an intermediate-term advance, I'd expect that number to remain below the 547 new 20-day lows registered on 3/28.

Those financial issues have continued to exercise leadership on an intraday basis, as they capture relative confidence and lack of confidence in the financial system. I will be watching them, as well as how well price holds up on any consolidation from this overbought level, to handicap the odds of our breaking above that 1400 region in SPX.