Sunday, November 01, 2009

Indicator Update for November 2nd

Last week's indicator review found weakness following the momentum highs of September. As we can see from above, that weakness continued this past week, taking the S&P 500 Index back toward its early October lows, with a majority of sectors trading in downtrends and clear technical damage to several stock groups.

The Cumulative Demand/Supply Index (top chart) is in very oversold territory that generally corresponds to at least a short-term bottom area in stocks. New 20- and 65-day lows (middle chart for 20-day lows) have expanded significantly, taking out the levels of new lows seen during late August through early October. Indeed, as the chart from Decision Point indicates (bottom chart), we've also taken out the early October lows in the advance/decline line specific to NYSE common stocks. Of the last 11 trading sessions, only three have seen more advancing than declining issues.

While this is clearly a correction and it is reasonable to expect further bottoming action even after any reflex, short-covering rallies, I expect us to ultimately hold the June/early July lows in the A/D line, with accomodative Fed policy continuing to support the risk rally and pressure the U.S. dollar. For that scenario to hold, however, we need to start seeing a reduction in the number of stocks making fresh 20-day lows and positive readings in the Demand/Supply Index. As of Friday's close, we did see new 20-day lows fail to reach Wednesday and Thursday levels despite the sharp market drop. I will be watching closely to see if this divergence holds: keep an eye on the updated indicator posts via Twitter prior to each market open for the latest readings.