Thursday, February 14, 2008

A Bit of Caution Here and Other Thursday Ideas

* Getting Overbought - Above you see my Cumulative Demand/Supply indicator, which I last updated on Friday and highlighted at the recent market peak. We are very close to that overbought level described in the latter post in which 20-day returns have been subnormal. That provides me with a note of caution, despite several days of strength this week. I also note that we had 900 new 20-day highs on Wednesday, well below the 1728 at the beginning of this month. Finally, we're hearing some cautionary notes from Rennie Yang at Market Tells, who notes subnormal short-term returns after the banking index underperforms the broad market on a rising day, and Jason Goepfert, who observes that three consecutive rising days in a downtrending market leads to poor near-term returns. See also Rob Hanna's excellent site, and his post on this topic. I heartily recommend these sources of historical market patterns.

* Where's the Volume? - Trader Mike looks at the indexes and finds tepid participation in the recent market rise. Trader's Narrative, however, detects some skepticism regarding the recent rally.

* Recession Views - Investments that perform best in recession, sentiment cycles, and Fed pumping money into the banking system: just a few of the timely links offered by Kirk. Thanks to a reader for this piece of perspective from Todd Harrison on what the market is currently pricing in--and what it's not.

* What Credit Markets Are Telling Us - Abnormal Returns offers perspectives on high credit correlations, high risk aversion, and more.