Is Stock Market Uptrend Still Intact?

“I take the action of the stock and bond markets this week (and particularly today) very seriously. Extreme caution is advised. The primary trend of the market is bearish, and the secondary trend may now be turning down,” said Richard Russell (Dow Theory Letters) on Friday.

After equities’ seven month climb, stock markets certainly look vulnerable for a decline. Two downside reversal days - on Wednesday and Friday - would seem to indicate that stocks could commence a pullback to work off the overbought condition, allowing fundamentals to reassert themselves.

Bill King (The King Report) reported Art Cashin as saying that since June 2007 the Daily Sentiment Index (as published by Trade-Futures.com), which polls futures traders, has reported more than 90% bulls on the S&P only once.

When would you guess that time to be? July 2007? October 2007? Wrong. It was last month … optimism has soared, from 2% bulls in March to 92% bulls in September. The latest reading is 90% bulls.

The major moving-average levels for the benchmark U.S. indices, the BRIC countries and South Africa (where I am based) are given in the table below. With the exception of the Dow Jones Transportation Index, which is trading marginally below its 50-day moving average, all the indices are still holding above their respective 50- and 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The October lows are also given in the table as a break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher reaction lows.

Click here or on the table below for a larger image.

Still from a technical perspective, Adam Hewison (INO.com) sounded a cautious note on the Nasdaq Composite Index as explained in one of his popular technical analysis presentations. Click here to access the presentation. (The analysis was done on Tuesday, but is still as relevant today as it was a few days ago.)

Lowry’s Buying Power Index has been declining over the past few days, indicating that buying power might have exhausted itself and that short-term advances have been capped. With the Federal Reserve Board scheduled to end its quantitative easing program net Friday, I will bide my time while the fundamentals play catch-up. Meanwhile, caution remains the word.

Comments

[Alphameister:]

Thank you for a timely overview and also for the links. I am heavily hedged in anticipation of a pullback that has the potential to be more than routine.

Oct 25 10:54 AM

[Pauly B:]

As long as the FED maintains current policy I see no major decline in the markets or commodities as they continue to drive the dollar down. Any change by the FED though and watch this market unwind.

For the present, (with current FED policy) I see 1250 on the S& P by years end.

Oct 25 01:31 PM

[Shishir Nigam:]

Very similar articles and thoughts from the technical analysis front have been put forward at EACH of the numerous minor corrections in this extended rally. As an example, consider any of the small corrections that happened in early July, in mid Aug, in early Sep, in early Oct and now in late Oct.

In every instance, a big overhanging resistance was talked about, a reversal in the uptrend was talked about, a pullback in the overbought conditions was talked about -- but each time the market broke through resistance and shot higher.

What I'd like to ask is how is this time any different?

For more analysis, check out my blog: youngandinvested.com

Oct 25 04:03 PM

[VP of Commo...:]

At some point the bear perspective has to be correct. You choose the evidence. Assuming the market will rise indefinately is just plain silly.


On Oct 25 04:03 PM Shishir Nigam wrote:

> Very similar articles and thoughts from the technical analysis front
> have been put forward at EACH of the numerous minor corrections in
> this extended rally. As an example, consider any of the small corrections
> that happened in early July, in mid Aug, in early Sep, in early Oct
> and now in late Oct.
>
> In every instance, a big overhanging resistance was talked about,
> a reversal in the uptrend was talked about, a pullback in the overbought
> conditions was talked about -- but each time the market broke through
> resistance and shot higher.
>
> What I'd like to ask is how is this time any different?
>
> For more analysis, check out my blog: youngandinvested.com

Oct 25 10:37 PM

[Joe Shareho...:]

I wouldn't be surprised at all to see a sell off on GDP day, even if it's positive. One thing for sure, if it's not above the 3.5% some have pegged it to be, then there will be a sell-off, even if the GDP is positive.

Oct 26 12:21 AM

[Moon Kil Woong:]

Fed currency devaluation has been the primary trend to this market. And reversal to devaluation should see a natural reversal in the stock market.

Even though it's possible that the Federal Reserve will strengthen the dollar for a while the Federal Reserve's persistent dollar devaluation trend stays in tact and can be traced over not just years but decades.

However, short term (a period of years) an ending of QE will be a very positive thing, not just for the dollar but for overall fiscal sanity. The big question is, once the Federal reserve and the government has tasted the addictive waters of unlimited free stimulus money with no "real spending or cost" can it stay away from it for long? Like a druggy one coke and heroin for a year, the answer is probably not. Especially when their dealer is the Federal Reserve who has no morals compass whatsoever.

They'd probably approve of selling half of the population into slavery just to boost bank profits. Well, if you consider your children owing over $100k upon birth as indentured servitude, I guess they have already done that. Last I checked, the Federal Reserve wholeheartedly embraced Bush Jr's spending plans and budget and now Obama's. Is this what a you call sound economic advice? I think not. They operate more like a devil's advocate. The question is what word do you use to define the Federal Reserve? As far as I know there is no antonym for economist.

Oct 26 03:02 AM

[Mad Hedge F...:]

oonw When everything is working, and my portfolio is firing on all 12 cylinders, I pinch myself and ask “Is this real? What can go wrong?” I’m reminded of the slave whose task it was to remind conquering Roman generals “All glory is fleeting.” Virtually all of my recommended core longs in gold, silver, Canadian, New Zealand, and Australian dollars, Brazil, Russia, India, South Korea, Taiwan, Vietnam, and junk bonds are at or near highs for the year. I called the bottom in Natural Gas within 40 cents, and mercifully baled on my one short in US government bonds, the TBT. What we are seeing is a global surge in liquidity as cash emerges from the bomb shelter, squints at the day light, and then rushes to buy the first thing it can find. Everything is going up, regardless of fundamentals. It is the proverbial tide that is lifting all boats. You can make a lot of money in these conditions, but there is no way of knowing if this will last for one week, or another year. But they can go on much longer than you think. In the last two liquidity driven markets I traded, Japan in the eighties and NASDAQ in the nineties, fundamental analysts railed against the tide for years, claiming that stocks were overvalued, each call getting their office moved ever closer to the elevator and men’s bathroom. When someone finally did throw the switch on these markets, it got dark amazingly fast. Tokyo went out at an all time high on the last day of 1989, and then dropped a staggering 45% in January. NASDAQ plunged just as fast from its 2000 top. The one thing we can all be certain about is that the survivors have vastly improved their risk control after our recent crash. Make hay while the sun shines, but keep your finger hovering over that mouse. The level of risk is definitely high than it was in March. When the next real downturn starts, it could resemble a flash fire in a movie theater.

Oct 26 06:24 PM