Thursday, October 16, 2008

A Midweek Look at Stock Market Indicators

* Dollars Continue to Flow Out of the Market - The top chart shows money flow for the 30 Dow Industrial stocks; note how the four-day moving average (pink line) plunged to lows when we made our recent market low and has stayed below the zero line after briefly spiking positive. This indicator has been the single most important factor keeping me out of stocks on an investment basis, and it continues to suggest that institutional investors and traders are transacting more volume on downticks than upticks--not something we'd expect to see if they were finding value at lower prices and accumulating stocks.

* Divergences Brewing? - As we test the recent market lows, note that the Cumulative NYSE TICK (bottom chart; blue line) is still well off its lows. I noted that we made bear market lows on Wednesday in a couple of sectors, including homebuilders ($HGX) and semiconductors (SMH) and near lows in materials stocks (XLB). Banks ($BKX), however, are well off their lows and only 646 stocks made new 20-day lows on Wednesday, much lower than the 5000+ new lows at the recent market lows. I'm watching closely to see how indicators hold up on any further test of lows and might even nibble at the long side if we see sectors holding up well. Still, that will be a trade rather than an investment as long as money flows (see above) stay negative.

* Broad Weakness - As readers know, I maintain a basket of 40 stocks that are divided evenly across 8 S&P 500 sectors. These are among the most highly weighted $SPX stocks, so they provide a good snapshot of the large cap market. As of the Wednesday close, 39 of the stocks were trading in downtrends by my Technical Strength measure (a quantified measure of trending) and only one stock (WFC) was neutral. According to Decision Point, less than 2% of NYSE issues are trading above their 20-day moving averages and only 1% of S&P 500 issues.

* Nice Historical Perspective - "There have only been two other times in the last forty years that the 200-day average has remained negative for six months - August of 1973 and February of 2002. In both cases, the market continued to trend steadily lower until the 200-day average rallied convincingly back above the zero line, signaling a real end to the selling pressure and a long-term bottom. There's little reason to think this time will be any different." - Rennie Yang, Market Tells.

* Catching Trends - This recent post was particularly relevant to trading Wednesday's market.

* Twitter Note - Several readers have asked me to include real time trading comments and observations about markets in my Twitter posts. Thus far, the Twitter feature of the blog has been used to update readers in the AM about upcoming economic reports, market indicators, and links to articles on market-moving themes. My extensive travels and work with traders make real-time market commentary difficult, but when possible I will try to include observations of particular note. Thanks as always for the interest.