Sunday, January 13, 2008

Indicator Review: Glimmers of Stock Market Strength

* Interesting Divergence - We're continuing to see divergences between the Cumulative Adjusted TICK Line (blue line above) and stock prices, suggesting underlying buying pressure. When I drilled down, I found that this is indeed a function of above average buying, not simply reduced selling (very different from recent rallies). Eight of the past nine trading sessions have closed with a positive Cumulative Adjusted TICK on the day. Despite Friday's price weakness, we saw 672 stocks make fresh 20-day highs against only 1120 lows--many fewer lows than the 3138 registered on Wednesday. If we do see additional price weakness early this week, I'll be looking for further divergences. (Note also reduced bearishness in my relative sentiment indicator).

* Reduced Downside Momentum - The Demand/Supply figures showed maximum downside momentum back on December 27th, when we had Demand at 34 and Supply at 173. By January 4th, we had Demand at 18 and Supply at 126. (That means that seven times as many stocks were closing below their volatility envelopes as above them). When we hit further price lows on the 9th, Demand was 49 and Supply was 49. Friday, we had Demand at 34 and Supply at 56. It is very common for Supply figures to dry up during a bottoming process and for Demand to dry up ahead of cyclical price highs.

* Fresh Look at the Basket of Stocks - As regular readers know, I track 40 stocks from the S&P 500 universe that are evenly divided (and highly weighted) among eight sectors. On Friday, we had 7 stocks closing in uptrends, 4 neutral, and 29 in downtrends. Usually, prior to a turnaround in a downtrend, we'll see more stocks in that neutral category prior to any upside breakout. We're not there at this juncture. Among sectors, we see quite a bit of technical strength among health care issues and surprising weakness among tech stocks. At -1180, my Technical Strength Index is quite weak, but far stronger than the -2300 reading earlier in the week. So we're seeing strengthening in this measure, but not an outright bullish turnaround.

* Continued Defensiveness for the Advance-Decline Lines - We see fresh new lows for the Advance-Decline lines specific to the NASDAQ 100 stocks, the S&P 600 small caps, and the S&P 400 mid caps. Most ominously, we're seeing new lows for the Line specific to common stocks traded across the NYSE. The Advance-Decline lines that are still holding up are those for the Dow 30 Industrials and for a couple of S&P 500 sectors: health care and consumer staples. In short, we're seeing weakness in the broad market and among growth sectors; relative strength among defensive sectors. This seems to be a market that is indicating recession; while some of the indicators are strengthening, I'll need to see some buying conviction in those growth areas and across the broad market before putting significant long term capital to work on the long side.

* Good News, Bad News - On Friday, 20% of NYSE stocks closed above their 50-day moving averages, a level that has marked short-term bottoming over the last several years. That's the good news. The bad news is that we've never had a bear market over the last 20 years that hasn't ended before we've had 20% or fewer stocks closing above their *200* day moving averages. Right now, across the NYSE, that figure is 28%.

* Revealing Sectors - The S&P Consumer Discretionary stocks (XLY) are hovering at 3-year lows, with only 2% of them closing above their 50-day moving averages. Among S&P 500 Technology stocks (XLK), none closed on Friday above their 50-day moving average and only 11% are now trading above their 200-day MAs. This sector has seen considerable recent weakness, due in no small part to concerns over economic growth and recession.


My Indicator Review From Last Week

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