So far so good as the saying goes. The majority of our primary momentum indicators as well as the short-term measures peaked in early November. Over the past two to three weeks we have seen these indicators correct that deep overbought reading moving back to some level of neutral. Even as the indicators were correcting the averages held the averages have stayed flat to higher, with the S&P gaining 1.5% from November 5 to last Friday. This was one of the key factors discussed last time in helping to confirm a strong momentum surge as real.
Another factor not discussed last time is the initial move from overbought to neutral on the indicators is usually very short lived. This could have fallen under the discussion of persistency, when the indicators get overbought and just stay overbought but this does have a slight bend to it. That was seen last week when the McClellan oscillator moved below zero on November 19 and turned right back up above zero the next day. Periods of strong momentum do not see the initial overbought correction develop into an oversold condition on the initial reaction. This of course is not 100%, nothing in the stock market is, but it is more so than not.
Ok now that the market looks to have passed the first hurdle lets look at a few of our concerns. The only one of our four primary momentum indicators to move back to a fully overbought reading after the initial move to neutral was the breadth oscillator. The volume oscillator came close but neither of the McClellan oscillators have done more than move to a modest neutral level. More of a concern is the fact that volume based measures, be it our volume oscillator or the McClellan volume oscillator have lagged terribly. This is in stark contrast to what we saw coming off the initial thrust from October 25 when the volume measures, across the board, were stronger. Some of this may very well be due to the lack of volume around the Thanksgiving holiday. The holiday certainly did not affect breadth as the issues continued to trade but on lower volume. Longer-term readers are very well aware that we do not look for reasons or excuses as to why something did or did not occur either in price or within the indicators. We tend to always approach them on face value and understand that if there is a valid reason for something in the market to act out of normal expectations it will be taken cafe of by the market. To this end, this coming week should provide a lot of information as it pertains to the volume based indicators.
Sentiment continues to be a major concern. Most all of our indicators show a major acceptance of the rally. It did not start seriously until early November but other than one or two indicators it has also not abated. As an example, the four-week moving average of Market Vane is a hair from where it stood in early March and the Consensus Inc. moving average is at its highest and most negative since mid February. Insiders have continued to not only sell but to sell at an extremely high pace. In fact, they have not abated much in their selling for the past several months. The put to call ratios, both the CBOE and the equity 10-day moving averages are at their lowest levels since late January and are closing in on their early January lows. Keep in mind, however, that it took nearly two more months for the S&P to peak following the low in these ratios. This is not a forecast but a fact. It doesn't have to happen that way all the time but in periods of strong momentum this is more of the norm.
Another concern is the fact that while the S&P has moved well above its March high, the DJIA is still 230 points below its respective peak. When viewed in terms of percentages its is just under 2%. this is not a lot but it is still a potential non confirmation. In October, the S&P held its August low by 2.8% while the DJIA broke its low and that turned out to be a fairly strong bullish signal. We are not pointing out these problems to make a bearish case for the market, but only to make it known that they are indeed here. The bearish argument does hold water and is valid. However, the strong momentum surge in early November and the markets subsequent behavior following that surge and initial momentum correction in our view has validated the early November signal. We again do not see this signal in the same vain as say October 1998 or even March 2003 in that it is signaling a move of the same duration. We do, however, see it as a strong argument that the rally has more to go. It may be only a month or it may be three months such as we saw following September 2001.
Whether the initial price correction is over or not we are not sure. The short-term indicators can support some continued correction or a strong rally. This should be clear this coming week but for now we are going to remain neutral. Medium-term we are neutral but with a positive bias and long-term we remain bearish.
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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