Where’s the momentum?

Positives:

Foreign Markets — Foreign markets have been acting quite well as of late. Some
of the broader-based foreign ETF’s like
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look to be putting in Cup & Handle type formations similar to our own market.
Potential leadership is also taking form in some European countries that are
close to or at new highs. These include Italy, Belgium, the Netherlands, and
Spain. The S&P Global 100
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days. Plurality among markets is a plus and leadership abroad can help to lift
the U.S.

My Growing Watch List — This is barely positive. My watch list has been
growing. I am seeing more stocks set up in basing formations than I am seeing
bases fall apart. There is more and more potential leadership out there should
the market try and mount a serious rally. Unfortunately, while growing, the
watch list is growing much slower than it normally does in a healthy market
environment. I’m marking this down as a positive, but not a very exciting one.

Neutral:

Sentiment — Sentiment is sending mixed messages at this point. On the one hand,
based on surveys, the number of bears has been rising. People are more and more
worried about a correction. On the other hand, the
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quite low and the OEX put/call ratio is quite high. Both of these indicate
weakness is likely in the short-term. Sentiment tend to work best at extremes
and when many different reading are all pointing in the same direction. In this
case, I am seeing conflict among indicators and therefore do not believe a huge
edge is being provided either way.

Accumulation/Distribution — To measure price and volume action you need two
things — price and volume. Volume’s disappeared. On the plus side, I haven’t
seen any distribution. While there have been some days where the market has rose
on increasing volume, there hasn’t been a single day where volume has even been
average (based on the 50 day average volume) since the 2nd week in August. In
other words, volume has not been providing any real indication of institutional
buying conviction.

Breadth — Breadth, like sentiment, has been sending some mixed signals. On the
one hand, advancers have been beating decliners by a nice margin. A/D lines are
moving up and there has generally been broad participation in the recent run-up.
On the other hand, the number of new highs has been seriously lacking. This
indicates many stocks have been simply bouncing off lows or building bases,
rather than breaking out to new highs. I’d like to see both of these pointing in
the same direction before getting to excited about what breadth may be saying.

Negatives:

UUWNHI (Unofficial, Unscientific, Working/Not working Hanna Indicator) — My
biggest concern in this area continues to be the lack of enthusiasm for
breakouts. I talked about this in detail in Monday’s column. Basically, I am not
seeing a large number of breakouts, and those that I am seeing are not following
through in a big way. One way to worsen the reward/risk ratio on a trade is to
lower the potential reward. That is what I’m seeing with breakouts currently.
Momentum stocks are now “slowmentum” stocks. This is a negative.

Wildcards — There are several wildcards that seem to playing against the market
at this point. One is the slowing economy. The period after the Fed stops
raising rates until they begin cutting rates tends to be a dangerous time for
the stock market. A recession scare could easily develop which would have a
negative effect on the market. The market is also entering a seasonally weak
period and is due for a 4-year cycle low. There is a real danger of a
September/October swoon here and mid-term election uncertainty won’t do anything
to help.

Summary — So while I am now seeing some positives, caution is still warranted.
I still believe the market will most likely suffer another leg down. My best
guess is that this low-volume drift upwards will end with a swift move lower. If
the move down is deep enough and scary enough, it could wash out enough players
that the market could set up nicely for a year-end rally. That’s just a guess,
though. I’ll keep watching and listening for clues from the market and adjust my
trading plan accordingly. Currently my trading bias remains neutral. Extra
vigilance with regards to risk management is warranted, I believe.

Best of luck with your trading,

Rob