Last week's indicator update noted increasing market weakness, but also divergences relative to July's lows. That theme continued this past week, as we maintained a modestly oversold condition in the Cumulative Demand/Supply Indicator (top chart) and expanded the number of stocks making new 65-day lows vs. highs (middle chart), but kept new lows well above the levels recorded in mid-July. Similarly, the Cumulative NYSE TICK continued to weaken during the week (bottom chart), but remained above its July lows.
Interestingly, though we are not far off 52-week lows in the NYSE Composite Index, a number of S&P sectors show surprising strength, including the financials. This strength is reflected in the advance-decline line specific to the common stocks in the NYSE Composite Index, which remains above its July lows. Still, with all of these intimations of divergences, the fact remains that money does not appear to be flowing into stocks; the bouts of buying that we've seen appear to be short-covering and sector reallocations, not fresh capital moving into equities. Combined with the weak NYSE TICK, it thus appears that sellers continue to maintain the upper hand in this market.
As my weekend Twitter posts have noted, this morning's market is poised to open very sharply lower on the heels of news regarding LEH's bankruptcy and a forced merger of MER. We'll thus be testing the mid-July lows in the S&P 500 Index and put some of those seeming divergences to the test. Equity put/call ratios are not yet at levels normally associated with market panic; nor have we seen the 30+ VIX levels that have typified recent intermediate-term bottoms. Note, too, that the Cumulative DSI (top chart) is not yet at oversold levels normally associated with intermediate-term bottoms. If we can hit those levels and retain the aforementioned divergences, I will be looking at the July/August period as a single bottoming process. I'll need to see buyers become more aggressive--in the NYSE TICK and money flow--to act on such a scenario, however.
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