The Current Bullish Bias

Markets held steady this past week. Given the big finish on Friday of the previous week, the fact that stocks held their gains without succumbing to profit taking is an indication of wide participation and solid investor sentiment.

The bad news of the week consisted of record high oil prices, Microsoft (MSFT) coming out with lackluster earnings and guidance and Ambac (ABK) coming out with downright horrible earnings. The fact that investors did not let these items derail the current rally shows how much strength the rally still has.

This is not to say, however, that everything is sunshine and roses. The Alert HQ market scan process has provided some sobering information. Each week, using the Alert HQ software, we scan over 7200 stocks and ETFs to see how they are doing with respect to various technical indicators. The results are summarized in the chart below. (Click charts to enlarge.)

Moving average analysis -- overall, still bullish

The moving averages we test show a moderating of upward momentum is taking place. The number of stocks that are above their 20-day moving average dipped a bit from last week and it has not yet recovered to the level of a month ago. The other moving average indicators, however continue to make slow but steady progress. The number of stocks above their 50-day MA increased ever so slightly.

More importantly, the number of stocks whose 20-day MA has made a bullish cross-over above their 50-day MA continues to increase at a nice steady rate. Every week it seems another 300 or 400 stocks move into this category. To me, this is an indication that the market is in the process of making a real change from a bearish bias to a bullish bias.

Other Indicators -- a mixed picture

Two other indicators we measure are Aroon and Chaikin Money Flow. Aroon shows that the number of stocks in a strong up-trend has continued to increase; however, it also shows that the number of stocks falling into a strong down-trend has increased for two weeks now. I am hoping that the increase in stocks in a down-trend is the result of those stocks who missed earnings. Since we are in the middle of earnings season, it is possible that what we are seeing is the effect of positive and negative earnings and earnings expectations and how they are beginning to be reflected in this indicator.

The Chaikin Money Flow indicator identifies stocks that are undergoing strong accumulation or buying. We see this indicator is also steadily moving upward. Not show on the chart is the number of stocks that are undergoing strong distribution or selling. This number has been pretty much flat for three weeks now. The bias here seems to be on the buy side.

Bullish bias remains -- what could hold us back?

The round up of technical indicators discussed above paints a relatively bullish picture of market action. Some of the indicators whose performances are moderating, though, show that the market is perhaps slowing its ascent. What's going on?

There are two factors at work. First is earnings. This was supposed to be a disastrous quarter, reflecting a recession, soaring commodity prices, a weakened consumer and the ongoing credit crunch. What we are seeing so far, however, is that earnings are generally somewhere in the vicinity of "OK". For the most part, it is only the financial stocks and the airlines that are truly turning in awful earnings. Guidance from most companies has been cautious, and why wouldn't it be in today's environment? So earnings not being as bad as investors had feared is a positive for this market.

The second factor is the technical setup. Looking at the SPDR S&P 500 ETF (SPY) in the chart below, we can see that we are at a point where a number of indicators all come into play.

We are up against the long-standing resistance at about $140. SPY has failed to break through this resistance several times already. We are up against the downward sloping trend line established back at the October high. We are at the top of the Bollinger Band range, indicating SPY is over-bought. Finally, SPY is just a few points away from its 200-day moving average which is still sloping downward.

It will be a real challenge for markets in general and SPY in particular to break upward through the resistance presented by these multiple indicators. The other major indexes are in more or less the same condition.

Conclusion

The bullish bias inherent in the market statistics we are collecting leads me to be hopeful. We are seeing a general firming in stock prices across the board. A little patience and no major earnings disappointments from bellwether stocks and we just might see stocks break out and begin a significant move up.

Comments

[gaucho]

You must believe in the tooth fairy. The housing market is at the BEGINNING of its crash and the OIL prices are just being felt. The Big $600 (wow), government rebate just enough to pay for the airline ticket to grandma’s house when theirs is given back to the bank. Maybe it will pay for 3 months gas.
Just three months ago BSC collapsed and the Fed saved the financial systems from collapsing? But now everything is going to be just fine. I am sorry I do not drink that Kool-Aid. We are in deep crap and the market is in denial.

[ekim]

gaucho do you want to be my stock broker?

[Lilguy]

So, are you putting new money in SPY ETFs now??

Indeed, the technical discussion above points out what I've said in other forums: You can make in forecast you want by cherry-picking the TA indicators. In this case, you have a mild preference for the favorable MAs and buying tendencies to the overall trend lines. (I would add that the volume indicator suggests that the large volume days are the big down market days. That's hardly bullish.) Why? Has statistical analysis shown the former to more reliably predict future market action than the latter?

TA needs an underlying econometric or mathematical theory rather than simply a series of lines on charts. The charts should follow the analysis, not vice versa.

[bearfund]

gaucho, what $600? I think they only gave that to people who don't work. Round these parts I don't know of any job but food service that won't pay more than their cutoff. I'm exaggerating of course but not by much. $90k is a pretty ordinary salary now and unless you live modestly (what American does that today?) it won't go far. Assume that anyone making little enough to get the "rebate" is so indebted that he's a week away from BK anyway. After all he makes half what I do and lives in a big ol house he financed 103% on an option ARM while I stay in the same tiny rent-controlled apartment I've lived in for years.

The key observation here was that they borrowed that $600 so if you're paying attention you got short Treasuries a while ago, which ought to have made you more than your $600 by now. Of course if you're smart enough to do that you're not one of the people who caused this mess in the first place so you probably don't care since bear markets are the only times it's really easy to make money. Whatever the Fed does I'm thinking SKF is about to be a buy. Sentiment is just way too positive to be justified by any fundamentals. Everyone thinks earnings are going to stay where they are. Where's that money gonna come from, anyway?