Monday, March 16, 2009

Indicator Update for March 16th

Last week's review of indicators concluded that, "Until we see evidence of a rising Cumulative TICK line and Demand exceeding Supply, it is premature to assume that oversold indicator readings will lead to a sustained market rally." We did, indeed, see strength in the NYSE TICK (second chart from bottom) as the week moved along, and Demand soared ahead of Supply. The eight S&P 500 sectors that I track moved from deeply oversold positions to a more neutral status, as formerly weak sectors saw significant buying.

While we saw advancing stocks trouncing decliners for most of the week (bottom chart), we're still in a downtrend in the advance-decline line for the NYSE common stocks, as nicely illustrated by Decision Point. Similarly, 20-day highs hold only a relatively slim edge of lows (second chart from top), and the Cumulative NYSE TICK remains well off its recent highs. In short, as impressive as the rally was, there is nothing yet that makes it different from other sharp bounces we've had in the past several months.

So what would we need to see to conclude that this is more than a violent short-covering rally? That's where the Cumulative Demand/Supply Index (top chart) enters the picture. If you click on that chart, you'll see that we've soared to an overbought point that has been typical of recent market peaks.

In a sustained bull move, pullbacks in the Cumulative DSI toward zero tend to be shallow in price terms and are followed by subsequent rises in Demand and spikes in the Cumulative DSI indicator, with price making new highs. In a bear market, peaks in the Cumulative DSI invite strong selling, a significant excess of Supply over Demand, and near-term topping out.

In other words, we'll have a good handle on the sustainability of this rally when we see if we can sustain days in which significant upside momentum (Demand) stays ahead of significant downside momentum (Supply). For now, two observations are germane: we're in a short-term bull move until the indicators show us otherwise, and--to this point--peaks in the Cumulative DSI are occurring at successively lower price highs. As long as the indicators remain strong, it's premature to fade market strength; as long as we see lower price highs and lower price lows during successive peaks and valleys in the indicators, it's premature to conclude that the bear market is over.