Sunday, January 31, 2010

Indicator Update for January 31st

Last week's indicator review found a market in oversold condition, but cautioned against catching falling knives given the steady weakness. That proved to be worthwhile counsel, as the weak market became weaker during this past week.

We can see from the Technical Strength (a proprietary short-term measure of trending) of the eight S&P 500 sectors that I track weekly (top chart) that the sectors remain in bearish mode, with the exception of Industrial stocks, which are in neutral territory. Other than the Industrial shares, the sectors that are relatively stronger are the more defensive Consumer Staples and Health Care names. Energy and raw Materials stocks remain weak, given commodity weakness, and Technology shares were notably weak. Financial stocks showed the greatest gain over the week, albeit from a very bearish trend position the week prior.

My Cumulative Demand/Supply Index (second chart from top), which tracks the momentum of stocks across the NYSE, NASDAQ, and ASE, is in oversold territory that, in the past, has led to significant market bounces. Such bounces tend to last more than one day, so at the first indication of Demand/Supply strength, I would be tempted to play the long side. In 2008, this indicator stayed oversold for an extended period, even as the market drove lower; that is reason once again to not catch falling knives and wait for Demand strength to signal sustainable buying interest.

We can also see that 20-day new highs minus lows (second chart from bottom) have remained skewed to the negative side for the past week. Interestingly, 65-day lows expanded throughout the week. Normally, an elevated number of new lows will bring in buying interest, if only because of short covering. That has not happened to this point, again warranting caution about those falling knives.

Finally, the Decision Point chart of the advance/decline line for NYSE common stocks (bottom chart) shows continued weakness throughout the past week. I am watching to see if the October lows can hold in the A/D line, as well as in the NYSE Composite Index. Thus far, we're not seeing any bottoming process in the advance/decline numbers.

All in all, this is clearly more than a short-term correction, as we've taken out lows from November and December and see short-term weakness followed by continued weakness. Intermarket themes among currencies and commodities have tracked the bearish stock market action; I need to see a shift in those themes before taking the long side for anything more than an intraday bounce.