Sunday, April 13, 2008

Is Market Weakness Offering Opportunity? A Long-Term Perspective on Stocks

With a major shout-out to Decision Point, here's a long-term perspective on the NYSE Composite Index ($NYA), which is a pretty good reflection of the broad stock market. The top panel shows price movement in $NYA, and the bottom panel shows the percentage of NYSE issues trading above their 200-day moving averages. I labeled the points at which we moved below 20% in the indicator. As you can see, those points captured major market bottoms in December, 1987; October, 1990; December, 1994; October, 1998; October, 2002; and most recently in January, 2008.

The percentage of stocks trading above their long-term moving averages is not a bad indicator of "overbought" and "oversold". If you think about it, we can define a bull market as one in which we see successive overbought and oversold levels at higher prices. A bear market is one in which we see successive overbought and oversold levels at lower prices.

I'm well aware of the market's short-term weakness, and I'll be commenting upon it in tomorrow morning's indicator update. But I wanted to pull up this longer-term perspective because, unless my eyesight is failing me, $NYA remains in one helluva bullish configuration. For all the sky-is-falling worries about housing, weak dollar, national debt, and toxic credit, we remain far above our 2002 lows and less than 15% off all-time highs.

Now maybe this time is different, and maybe the sky will fall. If so, my shorter-term indicators will pick up the expanding number of stocks making new lows; the sustained weakness in cumulative TICK, money flows; etc. But we've seen dwindling new lows since January, and the percentage of NYSE issues above their 200-day moving averages has been on the rise since then--even as we made price lows in March. If we cannot sustain the recent weakness and decisively take out the March lows, I will approach the long-term the way I approach short-term trading, entering an established trend on a pullback.


Getting Close to a Bottom?

Cracks in the Bear Foundation