Tuesday, May 27, 2008

Indicator Review for May 27th

In the last indicator review, I noted strength in a number of the indicators, despite concurrent weakness in money flows. Over the past week, the market's pullback has also brought weakness to the indicators.

New highs/lows (top chart), after reaching a post-March peak, have pulled back significantly. Indeed, we're now seeing more 20-day lows than highs, with 431 new highs and 1079 lows on Friday. This suggests that the recent pullback has been broader as well as deeper than normal during a market rise. Indeed, when we look only at NYSE common stocks on a 52-week basis, we find only 14 new highs on Friday, against 44 lows.

This idea of broad weakness is also expressed in the advance-decline line for NYSE common issues (bottom chart), as nicely displayed by Decision Point. While the broad averages are well above their February highs, the advance-decline line never reached that level and now is not far off March lows. In fact, the advance-decline line specific to financial stocks has been making bear market lows, and the lines specific to consumer staples issues, consumer discretionary stocks, and health care shares are all very close to March lows.

My Technical Strength measure is also showing weakness across the eight S&P sectors that I track--further weakness compared to my recent review. As of Friday, we had 6 stocks in my basket showing uptrends, 5 neutral, and 29 in downtrends. The energy sector is the only sector showing net uptrending, and even that has deteriorated in the last week despite firmness in the price of crude.

I maintain a cumulative line of my Demand/Supply indicator (which is updated each AM via my Twitter posts) and then compare the current reading to a long-term moving average (middle chart). The pullback of this adjusted Demand/Supply Index to below the zero line following a healthy rally is something that often occurs during the early phase of a topping process. As a result, I will watch the indicators carefully during any market bounce during this post-holiday, end-of-month week to see if we're losing steam to the upside, which would be consistent with a topping process.

In sum, the picture is neither as bad as bears would like to have it, nor as good as bulls would like. The January-March period represented a significant bottoming of the major indexes, but the subsequent rise has been restrained, with considerable sector rotation and unevenness and weak money flows. It is difficult to imagine sustaining a vigorous bull market on such a foundation.