Wednesday, August 12, 2009

A Few Thoughts and Observations About the Current Market

* The advance-decline line specific to NYSE common stocks is starting to act a bit toppy (bottom pane, chart above); credit to Decision Point for the excellent chart;

* Speaking of Decision Point, Carl Swenlin has a nice article out looking at intermediate-term momentum and what that is saying about the current market;

* XLE has never confirmed its June highs; the advance-decline line specific to the XLE stocks looks longer-term toppy;

* I notice we had a tick up in 20-day lows on Tuesday, with 655 20-day highs and 328 lows. Interestingly, new 20-day highs and lows were almost equal on the NASDAQ, which has shown recent relative weakness;

* We've seen gradual erosion in Technical Strength, though the majority of shares in my basket remain in uptrends: 25 stocks are in uptrends, 6 are neutral, and 9 are in downtrends. Technology and energy shares are the weakest group as of Tuesday's close; materials and industrial shares remain relatively strong.

* Short-term momentum has turned bearish for stocks, with Demand at 18 and Supply at 111. This means that about six times as many issues closed Tuesday below the volatility envelope surrounding their short-term moving average as closed above the envelope. As a rule, Demand and Supply tend to crest ahead of price on market rises and declines.

* I notice that 10-year municipal (tax-free) bonds are yielding 3.28% vs. about 3.66% for (taxable) 10-year Treasury notes. That is quite a change from the situation earlier in the year, when muni bonds yielded more than Treasuries on an absolute basis. Fear of default among municipalities has clearly declined, and there is considerable retail interest in yield;

* TIPS continue to price in modest inflation expectations; might the Fed end quantitative easing? We're starting to hear hints of limiting the stimulus punch bowl in China; if the U.S. soon follows, I'd expect supportive implications for the dollar and some pressure on stocks and commodities.