>There are a number of imbalances within the market and this points to a market that isnot firing on all cylinders. However, those cylinders that are firing are firing in a bigway and this has been enough to push higher.
The Nasdaq is challenging its August high, but the NYSE Composite remains well below itsSeptember high. It used to be the other way around in September when the NYSE Compositerecorded a new all time high and the Nasdaq could not move back above its August high. Inaddition, key breadth stats for the Nasdaq forged bullish breakouts, but key breadth statsfor the NYSE have yet to make the breakout.
The Finance sector left the other sectors in the dust with a 9.5% gain over the last fourweeks. The Finance sector has even outpaced the Nasdaq, which only managed a 7.3% gainover the last four weeks. When was the last time the Finance sector out ran the Nasdaq?Try August 2002 and April 2003. August 2002 marked a peak and start of a decline into theOctober 2002 low, April 2003 marked a breakout that lasted until March 2004.
The Russell 2000 ($RUT) could hold the key to a big broad advance. The index is tradingjust below the August trendline and early October high. As such, this broad small-capindex is underperforming the Nasdaq. RUT broke flag resistance on Thursday and furtherstrength above 675 would be bullish for a whole lot of stocks (about 2000 to be exact!).
Position Summary
-NasdaqComposite: Bullish with support at 2100
-S&P 500: Bearish with resistance at 1235
-TBond ETF (TLT): Bearish with resistance at 90
-US Dollar Index: Bullish with support at 88.5
-GLD: Bullish with support at 45.5 / 460
-XAU: Bullish with support at 100
-Oil: Neutral with resistance at 64
Have a great weekend
-Arthur Hill
Next: Update on Tuesday 15-Nov-05
***Playing A Reversal***
Before turning to the current situation, I would like to review my last bullish call.I turned bullish in mid May after a bullish catalyst and a breakout at 1180 (gray oval).Despite the April support break, the Mar-Apr decline looked like a falling price channel(corrective) and the May reversal showed power.
My position switched to bearish when the index came crashing through key support at 1200in early October. However, this support break failed to hold and a bullish catalyst formedwith the surge back above 1205. So why not turn bullish. In hindsight, I would like to bebullish on the break above 1205. In reality, I did not turn bullish.
The two week surge back above 1205 shows strength, but the index remains near the Augusttrendline and has yet to forge a higher high. I noted the 1999 and 2004 breakouts in lastweek’s report. From these breakouts, I pointed out the need for a trendline break andhigher high. The S&P 500 has yet to break the August trendline or forge a higher high.In addition, I also pointed out that the moves were 1/2 over by the time there was asignificant breakout. This is the crux of the problem. Turning bullish on the move above1205 left plenty of room for upside. Turning bullish now (at 1233) skews the risk-rewardratio and I do not feel comfortable with the current setup. As I will show below, breadthis not what it should be and this rally appears to be driven by one sector: finance.
>The Nasdaq is a different story. The index retraced 62% of theprior advance and recovered from the October support break with a big surge over the lastfew weeks. The move broke the August trendline and exceeded the September high. This is abullish breakout and I am setting key support at 2100. While I do have my suspicions onbreadth, the Nasdaq is one of the market leaders and this usually bodes well for themarket as a whole.
***Breadth***
I have been complaining about breadth lately and would like to take a look at thestatistics from the Nasdaq and NYSE Composite today. I usually look at the S&P 500 andNasdaq 100 breadth stats, in particular the AD Volume Line. Measuring breadth is liketaking the temperature of the market. The external appearance may be good, but it is paysto keep an eye on the internals.
Whereas the AD Volume Line for the Nasdaq 100 has moved little over the last three weeks,the AD Volume Line for the Nasdaq broke a down trendline and exceeded its 50-day EMA(green circle). This bullish signal occurred on 3-Nov and this confirms recent strength inthe index. As long as the indicator remains above the trendline break and 50-day EMA,there is no reason to question its strength.
This next chart shows the AD Volume Line for the NYSE Composite. To recap, the AD VolumeLine is a cumulative measure of the volume of advancing stocks less the volume ofdeclining stocks. There is no overlap between the NYSE and Nasdaq. This makes theirrespective AD Volume Lines good to compare the tech-dominated Nasdaq with the broader(non-tech) NYSE Composite.
While the Nasdaq AD Volume Line broke the September trendline and 50-day EMA, the NSYEAD Volume Line is stalling right near both (gray oval). The indicator broke the May-04trendline in October and the recovery has been less than spectacular. At least therecovery was not as spectacular as that seen in the Nasdaq. At the very least, a moveabove the 50-day EMA and September trendline is required for a medium-term bullish signal.So far, the NYSE Composite remains on its bearish signal.
Next up on the breadth list is Net New Highs. This indicator is a 10-day EMA of new52-week highs less new 52-week lows. This breadth indicator is bit of a laggard and I liketo use simple positive and negative crossovers to indentfy strength or weakness. For theNasdaq, this indicator turned negative the second week of October and positive in earlyNovember. Given the depth of the October dip, this was quite a feat and underpins thestrength of the current rally. Or does it? Despite the fact that the Nasdaq exceeded itsSeptember high and the Nasdaq 100 hit a 52-week high, the 10-day EMA for Net New Highs hasyet to move above +50. On Thursday, there was 128 new highs and 71 new lows (Net New Highs= 128 – 71 or +57). I am not impressed. In addition, the indicator has yet to moveabove to move above the early October high an is clearly not keeping pace with the index,which did move above its early October high. I said this indicator was a laggard and Iwill give it the benefit of the doubt as long as it holds in positive territory. A moveback below zero would be, well, negative.
For the NYSE, the 10-day EMA for Net New Highs has yet to move into positive territory.This is amazing when one considers that the index recorded an all time high in September.On the way down, Net New Highs dipped below the April low and below –100. Theindicator has recovered and is just below the zero line now, but clearly showing lessstrength than its Nasdaq counter part. For a broad market advance to lift all boats, thisindicator needs to move into positive territory and preferably above +100 like it did inJune.
***Sectors***
The sector score card favors the bulls, but weakness in the Consumer Discretionaryremains a concern. This histogram shows the 250-day Power Scores for the nine sectors andthe S&P 500. The Power Scores range from zero to 100 with 100 being the strongest andzero being the weakest. Three sectors are outperforming the S&P 500 and six areunderperforming. Even though the Industrials SPDR (XLI) and Consumer Staples SPDR (XLP)have high Power Scores (>80), these two stocks are locked in trading ranges and theircharts are more neutral than bullish. In contrast, the Finance SPDR (XLF) broke to newhighs and remains firmly bullish. The stock is getting overbought, but shows no signs ofweakness and has carried the S&P 500 over the last few weeks. The InformationTechnology SPDR (XLK) represents the other bastion of strength in the market with PowerScore of 86. Even though the Consumer Discretionary SPDR (XLY) is underperforming, theS&P 500 can plug along with just Finance and Technology moving higher.
The Finance SPDR (XLF) is up around 9.5% over the last four weeks. This is the biggestfour week move since June 2003. Prior to June 2003, the four week rate-of-change exceeded+9% twice in April 2003 and this kicked off a big advance in the broader market (Mar-03 toMar-04). While I hate to rely on one sector, strength in the Finance SPDR (XLF) bodes wellfor the broader market and there is little reason to question such strength as long asbroken resistance at 30 holds.
In April 2003, the four week surge in the Finance SPDR (XLF) was accompanied by a +15.2%surge in the Consumer Discretionary SPDR (XLY) an 8.82% surge in the in the InformationTechnology SPDR (XLK). That is a huge move for XLY and shows a clear change of heart(trend too). For the current four week period, XLK is up a mere 5.87% and the ConsumerDiscretionary SPDR (XLY) is up 5.88%. The March-April 2003 bottom was a strong advancethat lifted three key sectors and the Consumer Discretionary SPDR (XLY) took the lead..The current advance certainly lifted three key sectors, but the rate-of-change for theConsumer Discretionary SPDR (XLY) and Information Technology SPDR (XLK) is not thatimpressive. Big broad market moves start with the Consumer Discretionary SPDR (XLY)leading the way higher and this key sector is still lagging.
***Intermarket***
Trendline breaks have been prescient in the bond market and I am watching the fallingprice channel for signs of strength (magenta trendlines). TLT actually gapped up onTuesday and held the gap. Moreover, TLT extended its gains on Thursday and furtherstrength above 90 would break the falling price channel. This would be the first positivein bonds since August. Let’s see it happen first though.
While bonds are still falling, the US Dollar Index is still rising. The index brokeconsolidation resistance last Friday and this breakout is holding. Strong securities holdtheir breakouts and the upside target is 95 as long as the uptrend holds. A move backbelow 91 would be negative and further weakness below 88.5 would turn the trend bearish.
Is gold concerned with a strong US Dollar Index? It is tough to say. The one month trendis down as the StreetTracks Gold ETF (GLD) forms a falling flag. This is a bullishconsolidation pattern that represents a mild correction. A move above the upper trendlineand late October high would signal a continuation higher and open the door to 50 ($500 perounce). The breakout in the US Dollar Index is probably not helping gold as the trend hasbeen lower since mid October. However, Wednesday’s strong move filled the 1-Nov gapand this is impressive. I would still expect GLD to break resistance and move higher,regardless of what the US Dollar Index does. The big trend in gold is up and this holdsgreater sway than a breakout in the US Dollar Index. Look for XAU to break above 111 torevive the bulls.
On Tuesday, I turned neutral on West Texas Intermediate Crude (WTIC). Because the currentdecline is viewed as a correction within the larger uptrend, I decided to just go neutraland not outright bearish. WTIC is also trading near broken resistance and the currentdecline marks a 50-62% retracement of the May-Aug advance. The pattern, retracement andreturn to broken resistance are all characteristic of a correction. For this correction toend and the uptrend to resume, I will wait for a break above 64.
Model Portfolio
My stance on the Nasdaq is turning bullish because the bulk of the evidence favors thebulls. However, I am holding out on the S&P 500 because of relative weakness andlagging NYSE breadth stats. This makes for a split decision. As such, I will go ahead andset a stop-loss for QQQQ at 41.15. A long position was added in McDonalds last Tuesday(34) and the stock went ex-dividend on Thursday (67 cents). I am adjusting the entry priceto 33.33 to account for the dividend and setting a re-evaluation on a close below 31.
L = Long Position, S = Short Position, Qty = quantity of shares, REC = Re-evaluation close(close below REC for longs and close above REC for shorts), SL = stop-loss. This is ahypothetical portfolio based on even dollar amount of $10,000 per position. $20 wassubtracted to cover round trip commissions. This portfolio is meant for educationalpurposes and should not be considered a recommendation or solicitation to buy, sell orshort these securities.
The TDT Report consists of a brief update on Tuesdays and a full report on Fridays. Forshortened weeks (4 days or less), there will only be one report on the last day of theweek. Changes to the Model Portfolio and major indices are sometimes necessary betweenscheduled updates (Tuesday and Friday). As such, additions, deletions and/or updates tothe Model Portfolio may sometimes be emailed between reports. These will also be added tothe website.
Arthur Hill is not a registered investment advisor. The analysis presented is not asolicitation to buy, avoid, sell or sell short any security. Anyone using this analysisdoes so at his or her own risk. Arthur Hill and TD Trader assume no liability for the useof this analysis. There is no guarantee that the facts are accurate or that the analysispresented will be correct. Past performance does not guarantee future performance. ArthurHill may have positions in the securities analyzed and these may have been taken before orafter the analysis was present.
The Power Score (PS) is based on absolute strength and this can be compared against othersecurities for an idea of relative performance. The Power Score (PS) measures the strengthof a particular security for a given time frame: 20-day, 60-day, 120-day and 250-day.These are trading days and roughly equate to 1, 3, 6 and 12 month periods. A weightedaverage of the four Power Scores is then calculated with 12-months weighing the most andthe 1-month weighing the least. In general terms, readings above 55 are bullish andreadings below 45 are bearish. The zone between 45 and 55 is a transition area that can goeither way.
