Monday, September 22, 2008

Indicator Update for September 22nd

In the last indicator review, I stressed a dual perspective: increasing short-term weakness among the indicators, but continued divergences relative to the July lows. By Tuesday, this duality was so striking that I indicated, "I'm trading like a bear, but watching for investment opportunities like a bull." Indeed, we continued to trade lower into Thursday morning--all the while maintaining the divergences--until a dramatic burst of buying, sparked by news of a government rescue plan for troubled banks, moved the markets sharply higher.

As a result of the buying burst, the Cumulative Demand/Supply Index (which has been my best intermediate-term timing measure; top chart) moved from an oversold level below -30 to a modestly positive level. New 65 day highs minus lows (middle chart) turned dramatically positive with the rise after also failing to confirm its July lows. With over 2000 stocks across the NYSE, ASE, and NASDAQ making fresh 20-day highs on Friday, it was clear that a large number of issues participated in the market strength.

This broad participation was also evident in the positive money flow numbers for Thursday and Friday, as well as the reversal of weakness in the Cumulative NYSE TICK (bottom chart). Buyers clearly held the upper hand in the wake of the announcement of the rescue. In spite of that, sector performance was uneven, suggesting that much of the movement may have been frantic short covering and sector reallocation. I will be watching the daily Cumulative TICK and money flow numbers carefully to assess whether or not buying continues and validates that we have put in an important intermediate-term low. My best estimate at this juncture is that we have done just that and that we should be looking for higher prices into the first quarter of 2009, per the cycle analysis recently posted. Failure to expand the number of stocks registering fresh new highs, failure to maintain a positive sloping Cumulative TICK, and failure to broaden technical strength among the market sectors would weigh against this expectation; confirmations from these indicators would be supportive.