Monday, March 01, 2010

Indicator Update for March 1st

Last week's indicator review found that we had a bounce in market strength and were now gauging whether that bounce could lead to fresh bull market highs. This past week has kept this question in doubt, as most of the indicators weakened over that period amid signs that we might be making lower highs in the major stock market averages.

Recall that Technical Strength (top chart) is a measure of short-term trending. Sector Technical Strength is now mixed, with two sectors showing bullish readings (Industrial, Consumer Discretionary); three giving neutral signals (Consumer Staples, Financial, Technology); and three giving bearish readings (Materials, Energy, Health Care). The commodity-related Materials and Energy stocks were particularly weak from the prior week's readings; no sector showed appreciable strength from the prior week.

New 20-day highs continue to outnumber new lows (second chart from top), but remain off the prior week's peak. We also saw a spike in new 20-day lows on Thursday, reaching 458. An expansion of 20-day lows in a market that has been rising is one of the more reliable indicators of a market ready to turn around. I will be watching this indicator closely to see if we expand new highs and continue the uptrend from the early February lows or whether we show a pattern of toppiness among shares.

The Cumulative Demand/Supply Index, a running total of Demand minus Supply (second chart from bottom; see this post for more detail), also showed some deterioration this past week, but remains above zero. It is common for this indicator to top out ahead of price, so that fresh price highs on lower Cumulative DSI readings would not be uncommon in the least. Indeed, that is the usual pattern for market upswings. Failure to achieve higher prices and sustain positive Cumulative DSI readings would suggest potential problems with the bullish trend.

Finally, we can see the advance-decline line specific to S&P 600 small cap issues thanks to the excellent chart from Decision Point. We are at an important top level in that A/D line; I am watching closely to see if small caps can continue to lead the way higher, or whether they will roll over and move back into the advance/decline line range. New A/D highs among small caps would be a solid indication of a continued bull trend for stocks.

Overall, I'm in Missouri mode, content to let the market show me what it's going to do. I am mindful of the deteriorating indicators and the difficulty stocks are having in achieving new bull market highs, but I'm also impressed with how the market has held up thus far in the face of negative economic news. Until shown otherwise, I maintain the stance that we are in a cyclical bull market in a secular bear market and that we are in a topping/distribution phase of the bull move from last March.