Sunday, October 11, 2009

Indicator Update for October 11th

Last week's indicator review suggested that the summer lows in stocks would likely hold on the market's pullback, with eventual tests of the bull highs to come. That happened in spades, as stocks rose sharply from their lows, making fresh closing lows in the Dow (DIA) and S&P 500 (SPY) averages and taking the sectors back to short-term uptrends.

Interestingly, we're seeing progressively weaker upside momentum on market moves higher, as illustrated in the Cumulative Demand/Supply Index (top chart). A similar pattern can be seen in other momentum measures, such as the McClellan Oscillator. Even more concerning, we're seeing a number of divergences in the making as we register closing price highs for the bull market. This is nicely illustrated by the number of stocks across the NYSE, NASDAQ, and ASE that are making fresh 20-day highs minus lows (middle chart). Thus far, that number is significantly lagging behind its mid-September levels.

Note also the pullback in the bond market (bottom chart, kudos to To this point, stock market strength has been accompanied by bond market strength--a change from the bear market dynamic, which saw rising bond prices as a safe haven from falling stocks. Most recently bonds and stocks have risen together on the prospect of continued central bank ease. The latest pullback in bonds may be nothing more than a brief pause in a march toward sub-3% on the 10-year note, but it's on my radar as a possible stumbling block for stocks. Should the market become more concerned about inflation and a Fed "exit plan", that could lead to selling in shares as well as bonds.

To this point, I continue to view the market as having made a momentum peak in mid-September, with further price peaks to follow. If that is the case, we could see further upside in stocks, but we should also see continued divergences among indicators, sectors, and indexes prior to any protracted correction.

I will be updating market indicators each morning before the market open via Twitter. You can follow the Twitter posts by tracking the last five entries on the blog page under "Twitter Trader", or you can subscribe to the Twitter feed via RSS free of charge by going to my Twitter page. Please note that I will be updating both daily and weekly price targets for SPY via Twitter, as well as the usual measures of trend status, momentum, and strength.