Indicator Update

(Click charts to enlarge.)

 

Last week's indicator review concluded, "What this means is that we could see more broad, range-bound, whippy action as markets seek an intermediate-term bottom. Unless I see breakout strength in such indicators as money flow, NYSE TICK, and new highs/lows, my leaning will be to fade sharp market rallies, but also to fade tests of recent lows that are accompanied by non-confirmations in these indicators." We certainly did see the volatile, whippy action during the week and a seeking of a bottom by week's end. Did we see the non-confirmations that would lead us to believe, however, that we are near a bottom? The evidence, we shall see, is quite mixed on that score.

We continue to be oversold in the Cumulative Demand/Supply Index (bottom chart), which, if you recall, is a cumulative line of a daily index that compares the number of stocks closing above their volatility envelopes and those closing below. When we see persistently low Cumulative DSI numbers, it means that stocks are persistently closing closer to their lower envelopes than their top ones. That is a clear sign of broad market weakness, since the Cumulative DSI assesses all stocks traded on the NYSE, NASDAQ, and ASE. (I update the Demand/Supply numbers each weekday AM via the Twitter app, so that you can track emerging strength and weakness).

This indication of broad weakness is supported by the advance-decline line for NYSE common stocks, which has been making fresh bear market lows through the past week, as well as by the persistently weak money flows for the Dow industrial stocks. As I noted during the week, 38 of the 40 stocks I follow in my basket of highly weighted S&P 500 stocks across eight sectors are trading in downtrends based upon my Technical Strength measure. This is not what I'd look for in a market in which selling is drying up.

To be sure, the number of stocks making new lows vs. highs (top chart) were lower this past week than two weeks previous. Still, this number is quite elevated. For example, Decision Point reports that 228 of the 500 S&P large cap stocks made fresh 52-week lows on Friday. Among the 600 S&P small cap issues, 250 made fresh annual lows; among NASDAQ 100 stocks, fully 59 made new 52-week lows. While I'm making note of the divergences with respect to the number of new lows from two weeks ago, enough stocks continue to behave in weak ways to make me want to see confirmation of fresh buying interest before taking intermediate-term long positions in stocks.

I recently noted the weakness in the corporate bond market, particularly in the high-yield sector. This is important, because the current crisis is first and foremost a credit market event that has spilled over into the broad economy and affected stocks. As long as the credit markets continue to make new lows, it will be difficult to sustain a bull move in stocks. I am watching several market themes -- corporate fixed income weakness, Treasury strength, U.S. dollar and yen strength, and commodity weakness -- as a way of assessing likely moves in stocks. We'll need to see a reversal in those themes to begin any kind of bottoming in stocks.

Comments

[the social ...:]

You are probably familiar with Fosback's high/low Logic Index. He took the number of weekly 52-week highs and lows on the NYSE (all issues traded I think), and calculated the lowest of the highs or lows as a percentage of total issues traded. If the 10 week average of these percentages fell below 1% that was a bullish signal. It didn't matter if the low number was highs or lows. At the beginning of a bull market the percentage of stocks making new highs is extremely low, and when the bull market lifts off, the percentage of stocks making new 52 week lows is very low. He wasn't publishing in 2002; so I don't how the indicator did in forecasting the bottom of that bear.

I have calculated the indicator for myself since 2004, and it is getting close to a bull signal, although I suspect it is wise to wait until there are very few new lows.

If the 10 week average is above 5% that is a bearish signal. The Hindenburg omen seems to be a variant of Fosback's indicator. The sell signal failed at the end of 2005, but forewarned of weakness in May 2006. It issued a sell on 8/17/07 at the intermediate bottom. It has not come to signaling a buy until this month. As of Friday the 10 week average was at 1.62% and falling.

2008 Oct 27 09:13 PM