Looking at Last Week's Weakness, and What It Could Mean

Traders hoping to put in a bottom this week were disappointed as weakness expanded through the week. The advance-decline line for NYSE common stocks, helpfully tracked by Decision Point (top chart), shows us breaking down to new bear market lows. This was no doubt aided by weakness among secondary issues, as the Russell 2000 stock index made new bear market lows as well.

The new high/new low figures also found weakness expanding as the week moved along. Friday saw us register 99 new 20-day highs across the NYSE, NASDAQ, and ASE against 2564 new lows. While the new lows are still fewer than we saw a couple of weeks ago, so far the market's oversold condition has not brought significant buying interest, as can be seen from the money flow figures for the Dow industrial stocks (bottom chart). We have moved from very heavy selling to more neutral levels in the four-day average (pink line), but there is no evidence so far of sustained buying interest.

Among the 40 stocks in my basket divided evenly among eight S&P 500 sectors, my technical strength measure finds only one in a slight uptrend (AMGN), one neutral (WFC), and the remaining 38 in downtrends. What is significant is not just the broad weakness, but the way in which broad weakness has been sustained over time. We are seeing a historic liquidation of stocks and, so far, my indicators are not picking up any reversal of that trend.

Comments

[daytrader:]

brett,
concise&excellent article!to the point.

thank you,
daytrader

2008 Oct 25 11:08 PM

[morph366:]

Your observation of the historic liquidation of equities is very astute. What intrigues me is whether this is a result of forced selling by over-leveraged funds and will come to pass or whether institutions are undergoing a secular change in valuing those capital assets - equities that have the least claim, unlike more collateralized claims, on the value of a business

2008 Oct 26 08:10 AM

[jimmy Turano:]

Great article! Before it is over and done with, the majority of investors must see and hear the
'ALL CLEAR' alert. This is just like a forest fire out of control, and it will take some months of burning out before anyone returns in great numbers. Many investors have been burned already, so the confidence level is currently shattered. Quality companies will still be the foremost considered when investors start returning, like JNJ, MSFT,GRMN,FAST,NPK, and MKTAY, especially during a recession. Some of the biotech companies are interesting at these new levels, but some need to go bankrupt because they do not belong on the exchange any longer. They have cost shareholders huge amounts of losses, and some do not even have any products, but have huge debt, no sales growth, and investors have watched the stock drop between 85-95% in value over the past 12 months.
They continue to offer HYPED news releases while management still gets paid and receive bonuses.
They need to be weeded out and the research firms that follow and tout them too.

2008 Oct 26 09:25 AM