Monday, August 11, 2008

Indicator Review for August 11th

Last week's indicator review emphasized the range bound nature of the stock market, with more evidence of sector rotation than a fresh influx of funds being put to work. We broke higher late in the week on the heels of a strong U.S. dollar; now we need to see if this is a legitimate upside breakout. We remain moderately overbought in the Cumulative Demand/Supply Index (top chart), but have been making higher price highs with each bounce in the DSI--a pattern common after a strong upthrust from a very oversold market.

New highs/lows have stalled out for a while now (middle chart), but I did notice a pickup in fresh 20-day highs on Friday to 1385. An expansion above the level of 1742 recorded on 7/23 would be bullish for the market. Note that the Cumulative NYSE TICK has been making fresh highs during the past week, also a development in favor of the bulls.

The fly in the ointment is the continued lag in money flows. As long as we fail to see new funds coming into equities, the current rally looks more like a bear market bounce than the start of a fresh bull market leg. The financial shares have been a good bellwether for risk-aversion and risk-seeking in the broader stock market; I'll be tracking them closely.

Meanwhile, among the 40 stocks in my basket that are equally divided among eight S&P 500 sectors, we now see 24 in uptrends, 7 neutral, and 9 in downtrends--a decidedly bullish development, suggesting that many stocks broke to the upside with the late week rally. Interestingly, five of the nine stocks in downtrends are energy issues; the rest of the market sectors are looking bullish-to-neutral.

In sum, I retain my doubts that a bull market has begun, but the market's late week resilience, expansion of 20-day highs, and rising NYSE TICK line all suggest that we could see further movement to the upside. Global weakness has pressured commodities and aided the U.S. dollar: these dynamics are worth following as we move forward, as they may be catalysts for further share gains.