Monthly Broad Market Breakdown
As I
normally do at the end of each month, here is my broad market breakdown:
Positives
The current “confirmed rallyâ€
-Â Any time the market puts in a follow-through day shortly after a potential
bottom, that is definitely a positive. There has never been a major market rally
without a follow-through day. On the other hand, on their own, follow-through
days are not great predictors of market rallies. Follow-through days have
probably predicted something like 30 out of the last 10 major rallies, so while
they’re necessary, they are not necessarily dependable.
Neutral
New Highs vs. New Lows — There
hasn’t been strong conviction in either direction on the new high/new low
lists. In fact, even with yesterday’s follow-through day, Boucher’s Top RS/ER
New High list had zero new highs last night — a rather remarkable
achievement. The Boucher Bottom RS/ER New Low list had nine lows last night and
has not been consistently strong at any point in this downturn. Breadth
simply has not appeared on either side of the market.
Sentiment — On a short-term
basis the market has gone from oversold to overbought rather quickly, based on
the VIX. Bull/bear surveys and other intermediate-term indicators are not
showing much conviction one way or the other. It appears to me that the market
does not have an overwhelming amount of either fear or greed built into it
currently, and therefore I don’t see a big edge in either direction.
^next^
Accumulation/distribution —
This could actually be listed as a borderline positive. The reason I am calling
it neutral, though, is this:Â Although the distributive trend that had been
prevalent for much of the last few months has abated, strong evidence of
accumulation has not yet become evident. Technically, both the NASDAQ and S&P
had accumulation days yesterday and the NASDAQ also had one last week. But
while volume was higher than the previous day, it wasn’t much above average in
any of those cases. It will certainly be worth watching to see if further
evidence of accumulation appears.
Foreign Markets — Many foreign
markets seem to have followed the U.S. lower over the last few months, and many
have also rallied rather strongly in the last week or so. In looking at the
charts, most of these moves appear as though they may be nothing more than strong
bounces from extremely oversold conditions. That’s not to say they can’t become
the start of a new rally, but it’s a tough bet. Of the foreign markets I watch,
none of them are making new highs currently.
Negatives
My small watch list — I’m still
not seeing very many good looking basing formations. Under better circumstances
my watch list is normally significantly larger than it appears right now. This
tells me that the rally is currently lacking broad potential leadership and is
more prone to failure.
UUWNHI — The biggest story in
working/not working land currently is the lack of follow through on both
breakouts and breakdowns. In a strongly trending market, momentum stocks will
draw tons of attention on the day of their breakouts and the few days
following. It is not uncommon to see a sharp 15-20% rise immediately following
the breakout (or fall in the case of a breakdown). This kind of “piling on†has
been non-existent lately in both directions. Traders should monitor the success
or failure of recent breakouts like ERES, ELAB, and ALDN (ALDN being the most
explosive so far). On the short side, LZB broke down today and it will be
interesting to see if there is any follow through. Without conviction, prices
chop instead of trend, and that has been what has made this market difficult to
trade from a trend-trading perspective the last several months.
There are also a large number
of wildcards that the market is dealing with right now. These include
geopolitical risks (Iraq, terrorism, etc.), high oil prices, election
uncertainty, and the high likelihood of a rising interest rate environment. Any
news in these areas could spark either a rally or a selloff. If the market is
truly ready to move higher though, then even these wildcards will not matter.Â
While we are in a confirmed rally, increased breadth and follow through, along
with additional accumulation will be necessary for this or any subsequent rally
to succeed. Improvements in these areas would go a long way in raising my
personal level of bullishness.
Good Trading,
Rob
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