Monday, August 04, 2008

Indicator Review for August 4th

Last week's indicator review noted the rebound in stocks and the sharp bounce among most of the indicators. The view expressed was that the upthrust from an oversold level generally leads to higher prices over the intermediate term.

Since then, stocks have been largely range bound. We continue to see moderately overbought levels in the cumulative Demand/Supply Index (top chart); pullbacks in that indicator during an upturn generally represent good entry points for buying. Note that I update the Demand/Supply measure each AM in my Twitter posts. While we did rebound from the pullback early in the week, the number of stocks registering fresh 20-day and 65-day (middle chart) highs has not expanded. We also do not see positive inflows of capital into the Dow Industrial stocks, as shown by the money flow measure (bottom chart).

My Technical Strength measure shows that, in my basket of 40 stocks taken from eight sectors within the S&P 500 universe, 12 are trading in uptrends, 15 neutral, and 13 in downtrends. This suggests a range bound environment. With a Fed announcement coming up on Tuesday and BOE and ECB announcements on Thursday, it would not be surprising if we continued that range mode until there is further clarity on central bank policy.

We remain far from overbought levels longer-term. Among NYSE stocks, only 39% are trading above their 50-day moving average, and only 51% are above their 20-day averages. For S&P 500 large caps, those percentages are 36% and 47% respectively; for S&P 600 small caps, they are 55% and 63%.

I continue to view the recent market bounce more in terms of sector rotation and short-covering than in terms of fresh longer-term capital being put to work to take advantage of attractive valuations. We need to see increased money flows and an expansion in the number of stocks registering fresh new highs for this rebound to have legs.