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Market Summary and Forecast 4/20/4


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#1 TTHQ Staff

TTHQ Staff

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Posted 20 April 2004 - 09:41 AM

We try not to discuss the same thing two letters in a row but over the past two weeks we have seen some developments as it relates to sentiment that we find both interesting as well as important and we need to touch on this again. The counter trend rally from the March 24 low peaked the day of our last report on April 5. Since that time the averages are all showing modest losses. Moreover, while the rally was able to recoup a decent portion of its post March 5 loss it nonetheless did not make new highs. In spite of that and the weakness over the past two weeks a number of our key sentiment indicators not only failed to improve but actually turned more negative. For example, the last two weeks Consensus Inc. has reported 66 and 68 percent bulls. This is the highest one-week reading since late January. Market Vane has refused to drop at all recording readings of 69 and 66 percent. Our old favorite, Investors Intelligence has moved to 50% bulls and only 22% bears. This one only improved marginally and while this is an improvement it is still overly excessive. Last but not least The American Association of Individual Investors (AAII) moved to an unbelievable 64% bulls and only 14% bears. This is the worst bull to bear ratio since late January at the top of the NASDAQ. The sentiment combo is a combination of all four of these surveys. It was developed by our good friend Frank Barbera of The Gold Stock Technician. This indicator is bearish above 60 and bullish below 60. It has corrected from its most negative level in its 16 year history but even so it is still above most every reading previously seen with the exception of late 1997 early 1998. This is after correcting mind you. However, it has been over 60 for nearly 11 months and also shows an amazing degree of complacency. We can only imaging how mush worse these indicators can get if the market rallies further or how much further the market needs to decline to get them to a neutral level let alone a bullish one. It is quite obvious that the bullish expectations developed during the year long rally have not dissipated one bit. It also seems that the bullish fever developed in the 1999 2000 bubble completion period has not been quashed at all. The wall of worry is non existent and has been replaced by the old slope of hope. While the sentiment picture is clearly favoring the bears the momentum picture is giving off some very interesting and in our view not very positive signals. The rally into April 5 produced a modest but not overly strong overbought condition that stayed overbought for all of a day or two. Strong and persistent overbought readings are one thing and are usually a sign of a very strong market. We saw that throughout a good portion of the post March 2003 rally. An overbought condition that in and of itself is only modest but also is over quickly is not a sign of strength but typical of counter trend rallies that are more often a result of large takeaway numbers not a result of persistent demand. What has occurred since the peak in early April is that the breadth related momentum indicators have moved from overbought to a deep oversold level. The breadth oscillator moved to its worst level since January of 2003 and the McClellan oscillator has moved to its worst level since July of 2002. They key here is that these both hit readings that historically have been extremely consistent with lower prices not lows in price. This is like a momentum thrust in reverse. The volume counter parts are not nearly as weak as the breadth indicators as they only moved to a modest oversold level not a deep one. This is a complete reversal of what was occurring during the maj0ority of the rally from March of 2003. When volume indicators are stronger than breadth indicators during periods of strong breadth this is often a sign of strength as it represents broad based participation. However, when volume indicators are showing relative strength during periods of weakness in breadth indicators it is a sign of weak participation. More to the point, it is a strong indication that a majority of the advancing volume is finding its way into a narrow base of issues. This is usually seen at the end of a move or the beginning of a move down as money shifts into the more well known names, the big cap issues that comprise the DJIA. We have seen some confirmation of that of late from the short-term shift in relative strength of the DJIA versus the other averages. One other indicator that reflects this same observation is the Arms index. In simplistic terms, the Arms measures the relationship of volume on advancing stocks relative to volume on declining stocks. If all are in balance the Arms will be a neutral 1.00. A reading below 1.00 indicates that the advancing issues are getting more volume than the declining issues again on a relative basis. A reading above 1.00 indicates the opposite. A low Arms with strong breadth we view as a positive as it indicates broad based participation. A low Arms on narrow breadth indicates the opposite as it indicates that a small percentage of advancing stocks is getting a large portion of volume relative to that on declining stocks. This is exactly what has been occurring over the past few weeks. For example, on April 5 the A/D line was slightly negative while the Arms was .46 indicating an excessive amount of volume was moving into the advancing stocks relative to the declining stocks while the decliners outnumbered the advancing issues. Is it coincidence that the post March 24 rally completed on April 5? We think not. On April 13 we had 437 advancing issues and 2920 declining issues and a one-day Arms reading of 1.23. That is a neutral number. Compare that to March 22 when we had 759 advancing issues and 2532 declining issues and a one-day Arms of 3.39. On March 25 we had 2345 advancing issues and 912 declining issues and a one day Arms of .40. This was a modestly broad based session and led to a decent rally. Compare that to the data for April 5 above and you get the picture. The 10-day and open 10-day Arms got deeply oversold in late March and in very short order they moved to very overbought levels. in looking back over the past few years there were a few occasions when they moved from deeply oversold to deeply overbought and only once was that followed by higher prices. That was in late October 2002. However, there are a number of very important distinctions between then and now. The most obvious is that October of 2002 came after a multi year decline. More importantly in our opinion are two other distinctions. First both breadth and volume indicators participated and did so strongly as they hit thrust or initiation type readings. In addition, this occurred as the market was moving up not down as it is now. It is not impossible but close to it to find a period that marked an important low when the 10-day and open 10-Arms were at their current readings. One of our favorite and more important medium to long-term indicator has also turned negative. This indicator is the percentage of NYSE stocks above their 200 day moving average. It gives buy signals when it moves above 30% from below and sell signals when it moves below 70% from above. The latter occurred late last week and at the same time the indicator was also coming off a negative divergence as it had peaked in late January. The last such sell signal took place in April-May of 2002 which was well after the late March high. What is interesting about this signal is that this indicator moved well below its March 24 low whole the averages have not yet come close. We also saw the same from the daily A/D line. As we mentioned last week, this is the first lower low in the A/D line since August and the first time it has occurred ahead of price in a very long-time. Both of these developments are signs that the internal structure of the market is beginning to break down. This has already been in play from the new highs as far back as January as the new highs peaked in early December and again in early January and set off a series of negative divergences from those points. The weekly new highs are telling the same story as they peaked in early January. The deep oversold condition early last week suggested the potential for a bounce and that did occur late last week on Friday. The indicators that were deeply oversold such as the 3-day oscillator have moved back to neutral or near neutral and the bounced has served its purpose. There is still some room for a bit more rally very short-term but the majority of the indicators suggests that it may very well be complete. These same indicators have also reached levels that have almost always been followed by lower prices. In addition, the daily trend oscillators are beginning to turn down and are now modestly negative The medium-term picture continues to deteriorate as several more indicators have joined the bearish camp. While the bounced may continue a bit more we still see it as only a bounce related to the post April 5 decline We remain bearish short-term with a stop of 1145 on the S&P. Medium and long-term we remain bearish.