Sunday, March 14, 2010

A Look at Waning Stock Market Momentum

The top chart shows my proprietary measure of short-term stock market momentum. As a rule, momentum tops ahead of price. While momentum has stayed positive (above 1.0), we're seeing some waning of momentum as SPY (blue line) has marched to new price highs this past week. Given the recent market strength, with new 20-day highs significantly outpacing new lows, I'd look for pullbacks in momentum to under 1.0 as potential buying opportunities.

An even clearer illustration of recent waning momentum can be seen in the proprietary measure of Demand and Supply (bottom chart), which tracks the number of stocks closing above and below the volatility envelopes surrounding their moving averages. Demand tends to top ahead of price; note how we're not only seeing low Demand recently, but Supply actually outpacing Demand as we've moved higher.

Once again, I'd lean toward buying pullbacks in which Supply greatly exceeds Demand. As long as peaks in Supply are occurring at successively higher price lows, I would remain a bull on this market per the recent indicator review. An updated indicator review will follow shortly.