Monday, October 20, 2008

Indicator Update for October 20th

Last week's indicator review concluded, "I will need to see evidence of a drying up of selling pressure before concluding that the worst is over for stocks. Thus far, every indicator tells us that weakness has been expanding, not drying up." This past week, we saw a dramatic move higher in stocks, followed by an almost equally dramatic move downward, as volatility continued at extreme levels. So how have indicators fared?

Money flow has continued weak and the advance-decline figures suggest that no broad-based price strength is yet evident. The cumulative Demand-Supply Index (top chart), which cumulates the daily index of stocks closing above vs. below their volatility envelopes, remains at oversold levels, albeit off its recent lows. Similarly, we see weakness in the number of stocks registering fresh 65-day highs vs. lows (bottom chart), but these numbers are also well off their lows. For example, we had 107 new 20-day highs on Friday against 383 new lows. At the market's momentum low to date, we registered over 6500 new 20-day lows across the NYSE, NASDAQ, and ASE. Also well off its momentum lows is the cumulative NYSE TICK.

Thus far, I am working with the following assumptions:

1) The market made a momentum low for the recent bear move, and we are now in the process of bottoming;

2) Significant market declines (1974, 1981-2, 1987, 1990, 1998, 2002-3) have taken weeks to months to form bottoms, and the current bottoming process could be similar;

3) Given the current volatility, any market rise from such bottoming could be quite sharp;

4) While such bottoming may bring a meaningful intermediate-term low, it is not at all clear to me that we've seen the ultimate lows for this secular bear market.

What this means is that we could see more broad, range-bound, whippy action as markets seek an intermediate-term bottom. Unless I see breakout strength in such indicators as money flow, NYSE TICK, and new highs/lows, my leaning will be to fade sharp market rallies, but also to fade tests of recent lows that are accompanied by non-confirmations in these indicators.