Monday, March 31, 2008

Indicator Review for March 31st

Last week's indicator review noted only tepid strength following the bounce off the mid-month market lows. I also noted weak money flows among the S&P 500 stock sectors (article with link to all the posts here). A close look, sector by sector, finds that defensive themes are dominating the market--not something we'd expect if we were entering a bullish market phase.

For this week's indicator review, I recalculated money flows among the Dow Industrial stocks using my own data and methodology, rather than the data from Dow Jones. My conclusion (top chart) is essentially the same: there is no evidence at this time of sustained dollar flows into stocks. Even as the market has bounced, we have stayed below the zero line, suggesting that money is flowing out of the shares of the companies that comprise the index.

We can also see (middle chart) that new 20-day highs minus lows among NASDAQ, NYSE, and ASE issues have rolled over and, as of Friday, were essentially even. This rolling over was reflected in the Cumulative NYSE TICK, which turned down on Friday after seven consecutive days of positive readings. The fact that the TICK and the new highs/lows are not plunging suggests that we're getting more of an absence of buying in the recent market than an avalanche of selling. The result has been a rather steady drift downward for much of the week.

The best one can say about the situation is that the dramatic central bank interventions have helped stopped the selling, but have not inspired sufficient confidence to sustain buying. The fact that financial shares remain market laggards does not speak well for investor confidence on the heels of those interventions.

My momentum measures have turned downward. On Friday, Demand closed the day at 38; Supply was 127. Among S&P 500 stocks, only 38% were trading above their 20-day moving averages on Friday, down from over 70% early in the week. We're seeing a bit more strength among the small caps: among the S&P 600 small cap issues, 50% are above their 20-day moving averages, down from over 75% early in the week.

Among NYSE common stocks only, we had 8 new 52-week highs on Friday and 33 new lows--the highest level of new lows of the week, but nowhere near as high as the level seen mid-month. Meanwhile, the advance-decline line for those NYSE common issues is hovering just above its bear market lows--a clear sign that broad buying has not swept the markets.

If selling does not pick up early in the week, particularly in the NYSE TICK, I would expect the market to look for a short-term bottom and enter a range mode, with last week's highs as the upper end of the range. As long as Supply exceeds Demand and stocks making new lows continue to expand, however, I will be defensive on this market. Any pickup of selling would target an important test of the mid-March lows. I will continue to update market indicators and views daily in my Twitter comments.