Bullish Action in the Bellwethers

By Frank Barbera CMT. January 22, 2008

Today's update is designed to convey the extent of the stock market's recent decline in terms of where a number of key indicators now stand. In our view, stock prices have had a bearish tone for many weeks, and in all likelihood spiked down into a panic sell off bottom with today's trading. Now, this does not mean that all of the problems of the world are solved, that the bear market is going to go away or anything of that nature. What it does mean is that for the time being, stock prices have probably come down far enough, and would seem to (rationally IF that term ever applies in markets?) be due for some type of sharp snap back recovery rally.

While the major averages were unable to make it all the way back into positive territory for the day, they nevertheless did succeed in holding at levels well off their worst levels of the session with a number of notable sectors actually turning into the green. Among these we would take solace from the action in the Money Center Banks, the REITS, and the Investment Bankers, all of which ended with nice gains. Even the Regional Bank Indices ended with gains on the day, and in our view, that is a potentially huge positive as these stocks have been leading the market on the downside for some time. In the chart below, we show the NASDAQ America's Community Bank Index which has been falling now for just over 1 year. Looking back we find that the high was seen at a reading of 315.05 back on 12/28/06, with the index hitting a low today of 203.12. That means that over the last 12 months, this index has declined by 35.53% -- a huge decline with losses for 2008 already at 13.24%. Is this enough for the time being on the downside?

Above: American Community Bankers Index looks ripe for a retracement rally.

As can be seen on the next chart, while the index has been in free fall, looking behind the scenes at momentum the picture has actually been quietly improving for some time, with the 14 day RSI presently both oversold AND showing a potentially bullish positive divergence.

Above: NASDAQ American Community Bankers Index, getting ready for a bounce?

Perusing the rest of the Financial Sector, we see further signs of hope. Just look at Goldman Sachs (GS), in our view, �the bellwether� among bellwethers, ending today with a gain of 3.48 points or 1.86%. Among the investment bankers, Bear Stearns ended up 7.53%, Morgan Stanley up 4.29%, Merrill Lynch up 4.94%. Among major money center banks, JP Morgan closed up 3.21%, Wachovia up 5.26%, Wells Fargo up 5.57%, and even the much beleaguered Citicorp fought its way back from the depths to a virtual break even close, ending down only .05 at $24.40. Other walking wounded had a great day, with MBIA up 12.53%, Ambac up 28.55%, Freddie Mac up 3.69%, and PMI Group up 13.60%.

Above: Goldman Sachs - a nice upside reversal day possibility indicating a near-term selling climax low.

Among the Broker-Dealer equities, we note that the current levels have depressed the 12 month Rate of Change to levels rarely sustained for long periods of time with the index simultaneously coming down to test a longer range rising trendline. An area where the group could stage a nice rebound rally? Quite possibly, as the downside rubber band appears over-extended and overdue to snap back. Another bellwether we are watching is General Electric (GE), where again we see cause for hope. As can be seen on the chart below, with today's plunge the DJIA made substantially lower lows below last week's low; however, in the case of GE, which reported strong earnings growth last week, the share price held at a higher low this morning. The late James Alphier of Argus Research, one of the best technical analysts of the 20th century, noted that when a stock refused to make new lows in a panic along with the market averages, that it was usually a very good indication of underlying strength. For the stock market, which needs solid leadership, the bullish positive divergence in General Electric strongly suggests that a more important turn is at hand and that GE could lead on the upside.

Above: the DJIA and GE... another bullish bellwether.

In addition to some of the positive hints from key issues and key sectors, we see the usual raft of technical indicators that hint at a deeply oversold low, complete with positive divergence. Take the 10 day average of the closing Tick figure which over the last few days has NOT made new lows. In our view, this says something about a drying up in the degree of selling intensity. This is not to say that the selling today was not extreme; it was, but when compared to prior sell offs, this round of selling is showing a decreased rate of change in the downside momentum underpinning selling intensity, and to that end, we see another potential hint arguing for a low.

Above: NYSE Tick figure smooth moving average oscillator.

Of course, any number of classic indicators are also deeply oversold and suggesting a stock market ripe for a bounce. In the chart below, we highlight the Percent of Stocks Above their 200 day Moving Average, which is now fully oversold at multi-year lows.

Ditto, the S&P Unweighted versus the S&P Cap Weighted, where the average share of stock within the S&P 500 has moved down to a deeply compressed oversold extreme. Notice how the S&P Unweighted never confirmed the higher high in the S&P back in Sept-October of last year, a sure fire warning that a major top was being completed. Flash forward 3 months and the debate is closed, with every news channel now ushering in �news� that stock prices are in a bear trend. Good thing we have those news desks to count on, otherwise, where would we be? Never heard a word about any of these bearish divergences on CNBC, I'll bet.

Bottom Line: With stock prices in the headlines and everyone yammering about a crash, odds are high that for now the market is near a low and that a snap back recovery rally should get underway. If the Central Banks can build on today's Fed Rate cutting momentum, with more cuts coming from the Fed and cuts coming from the ECB and the Bank of England, the sentiment could mean revert and get back to something more optimistic than the crash psychology seen during today's session. In our view, a counter-trend bounce in the DJIA could easily lift prices back toward 13,000, 1450 on the S&P, and 2580 on the NASDAQ; that's a nice move, but entirely consistent with a bear bounce. On the downside, if the S&P breaks below 1260, then something is very wrong and prices will likely slide toward 1150 before finally coming to rest. Tomorrow, any move above 1330 on the S&P would very likely begin to trigger broad scale short covering and kick the technical recovery bounce into high gear. Stay tuned -- this should be lots of nerve-wracking fun -- what ever comes next. Welcome to the Greater Depression, where volatility will be the name of the game for years to come.

The S&P ended at 1310.50, down 14.69, the DJIA down 122.99at 11,976.31, and the NASDAQ down 45.96 at 2294.06.

That's all for now,

Frank Barbera

Contact Information

Frank Barbera CMT
Editor, Gold Stock Technician
PO Box 48072
Los Angeles, CA 90048
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