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Market Summary and Forecast 8/30/4


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#1 TTHQ Staff

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Posted 30 August 2004 - 08:36 AM

The rally the past two weeks has moved the NYSE A/D line to another new high surpassing the new high it recorded in early mid July. This has brought out a number of comments about how bullish this is for the long-term. We on the other hand do not necessarily see it as such. We touched on this in our latest interview with our good friend Ike Iossif of Marketviews.TV just this past week. We think it important enough to expand a bit on this. First off, go back and read the first sentence of this section again and you will see that we said that the A/D line surpassed its previous high in mid July. That new high in the A/D line occurred on July 20 with the S&P at 1100. Three weeks later the S&P was down over 40 points or 3.6%. However, this is not the first instance since the daily A/D line made its bottom in October of 2000 that this has occurred. at least eight times previously to some degree or another. Since the October 2000 A/D line low. Those dates are February 13,2001, June 5, 2001, August 24,2001, January 31, 2002, March 9, 2002, May 3, 2002, September 11,2002, January 14, 2003, and April 2, 2004. On a couple of occasions, such as January 31, 2002 the market held up for a a while and rallied to a double top in March on the S&P. However, only one time, May 3, 2002 did this lead to a decent rally as the S&P moved from a low of 1048 on May 7 to 1106 on May 17. Even here, however, the S&P dropped over 36 points or 3.3% from May 3 to May 7 before rallying into May 17. Most of the other occurrences took place at or near a top such as April of this year and March 2002 or in the early to middle stages of a medium-term decline such as May 2002. More importantly, not one of the previous 10 new highs in breadth lead to new highs in the S&P.

The one exception was in April of last year as the rally was just getting underway. However, in this case the S&P had rallied over 130 points or 16.5% from its March low and was breaking out as the A/D line was. This was the one time that breadth and price were moving together and actually price was a little stronger. There was also a minor new high in the A/D line on July 14, 2003 that lead to a modest decline into the August low. This was the only time during the 2003-2004 rally that we saw a new high in the A/D line not confirmed by price. When looking at the A/D line for just the S&P we get completely different picture. It has not moved above its March-April top during the rally although it has been modestly stronger than the S&P. From October 2000 to March 2001 the S&P A/D line did out perform the S&P as it was flat to higher. However, from that point on it made lower lows along with the S&P right into the March 2003 low. In fact, while the S&P held its October 2002 low in March of 2003 the S&P's A/D line moved to a new low and moved below its 1990 low. It like the NYSE A/D line rallied sharply into the March 2004 peak. However, while the NYSE A/D line actually moved to new all time highs the S&P A/D line only made it back to its March 2002 peak as did the S&P.

It is clear that the NYSE A/D line, at least from October of 2000, has been anything but helpful and to be frank it has given a number of very bad signals over the past three years. There have been a number of theories as to just what is causing the distortions in the A/D line. One theory is the proliferation of closed end funds and other interest rate related issues. This is not to be denied as nearly half the issues traded on the NYSE are what is deemed non operating companies. This alone is not the answer as there has been a number of times in the past three plus years when the A/D line was moving up strongly while interest rates were moving higher. Conversely, there were some periods when rates were declining sharply and the A/D line was flat to lower. The one common thread in both cases was the Russell 2000. In the periods of declining rates and negative breadth the Russell was moving lower. In those periods of rising rates and a rising A/D line the Russell was moving up. While we do think that the large number of non equity issues traded on the NYSE are part of the answer it is clear that it is not the only answer. The fact is that the A/D line is not what it used to be either in its composition nor in its function as a market indicator.

The rally the past two weeks has been decent with the S&P gaining 49 points or 4.6% and moving slightly above its August 2 peak. The rally has not been dynamic in the least, but it has been steady and persistent as the S&P has closed lower only twice in eleven days. In one way we could describe it as an orderly advance, which has kept the speculative juices from rising. This is evident from the still relatively high put to call ratios and the Rydex ratios. However, the volatility indexes have moved sharply lower over the past two weeks. After moving right to the same levels seen at the March and May lows they are now very close to the levels seen at a number of tops over the past eight months. This is in complete opposition to the readings from the put to call ratios and the Rydex ratios. At the March and June tops both had moved close to bearish along with the volatility indexes. We are not sure how this conflict will resolve itself but from what we have noticed is that the best signals occur when the put to call ratios are moving lower along with the volatility indexes. Other sentiment measures such as Investors Intelligence have improved significantly. They are not close to bullish levels and in our view they did not get close to levels that could support a full blown rally to new highs but solid enough to support more than we have seen so far.

A number of momentum indicators are overbought with both the breadth and volume oscillators deeply overbought and close to challenging their peaks seen in late May-early June. The breadth oscillator in particular has moved high enough in a short enough period to be viewed as a bona-fide thrust or initiation signal. This is not the case with the volume oscillator. Moreover, the McClellan oscillator and the McClellan volume oscillator are not close to those type levels. While we would not ignore the potential signal from the breadth oscillator we have found these signals considerably more reliable when the other three confirm, especially volume. Whether this is a true initiation signal or not they have, with the exception of the McClellan volume oscillator, confirmed price and from levels that are strong enough to be at least short-term bullish. Our biggest concern is volume. Last week for example we saw the three lowest volume days of the year and another that was in the lowest 7 or 8. We have heard a number of explanations or more accurately excuses or rationalizations for the low volume. They include the fact that it is August and every one is on vacation as well as the fact that the Republican National Convention takes place in New York City this week. As good as it sounds this is another one we do not accept. The fact is that the low volume shows a lack of demand on the part of investors and traders. to us we see it as a sign that the market has rallied not on investment demand but from a dearth of sellers. This does not mean that the rally can not carry on for while. To the contrary, we have seen a number of low volume rallies last longer than one might expect. However, we also see the low volume as a longer-term negative. This of course could change if indeed we start to see volume begin to pick up. However, expanding volume as a rally progresses can be a double edged sword as it can just as easily signal an increase in selling as much as an increase in demand. The longer the rally goes on low volume the more the odds favor a negative signal from a pick up in volume. As such, if we are to see a positive increase in volume it needs to happen sooner not later.

The short-term volume oscillators and the 3-day oscillator continue to show minor negative divergences and remain on a sell alert signal. This along with the overbought condition from the primary momentum indicators and the 10-day and open 10 Arms are among some of the indicators that support the potential for a short-term correction to get underway at any time. However, most all of our indicators, other than the very short-term measures have confirmed price and from levels that most often indicate higher prices at least on a short-term basis. We see any decline/correction from current levels as being related to the post August 13 rally. We expect it to be modest and well contained and more importantly to be followed by higher prices. We remain bullish short-term with a stop of 1076 on the S&P. Medium-term we are neutral with a positive bias and long-term we remain bearish.


Best,
Larry Katz




Larry Katz
email me at: LK1618@mta.org
website link: www.marketsummaryandforecast.com


Larry Katz serves as both editor and research director of Market Summary and Forecast. Mr. Katz is a full member in the Market Technicians Association and is both one of the founders and the president of their Southern California Chapter. He also serves on the management committee chairing the membership committee. Mr. Katz is a regular contributor to Top advisors corner on America On Line. He is a regular guest on the Business Channel in Los Angeles with Richard Saxton. He has been a quest speaker of the Market Analysts of Southern California (MASC), the Omega users group of Thousand Oaks, Ca. and Orange County, the Market Technicians Association Atlanta Chapter as well as the Foundation for the Study of Cycles. He also ran a workshop at the Market Technicians Association 1999 Annual Seminar. He has been a regular commentator on the Reuters Financial network, both in the US as well as in Japan, as well as being published in the Market Watch section of Barrons Magazine on a number of occasions. He is currently ranked in the top five for intermediate term gold timing by Timer Digest.

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