Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

A Bull Market in Indecision
Searching for Trends in a Trendless Market

The S&P 500 touched 1,155 on January 27^th of 2004, over 15 months ago, and as of Wednesday night it sits at about that same level. In that time, there has been so much analysis, so little movement and so much money floating about looking for a speculative gain. It appears that there is nothing profitable happening in the long and intermediate term, and in the short term there are only small market gyrations that appear to be getting smaller and smaller as over 8,000 hedge fund managers jostle for a couple of tenths from the greater fool behind them. This can be the calm before the storm or the calm before the party, or the calm that may last throughout the decade of the year 2000. Stocks seemingly have permanently broken the valuation tether in the ‘90s, so there is little use for valuation analysis in the intermediate term. With the intermediate term looking so indecisive, tonight I will look at the short term – that is days to week time frame to attempt to scratch out a few tenths like the legions of professionals that do this for their life’s work.

S&P 500

The chart below is a 6-month daily chart of the S&P 500 index. There are some bullish and bearish features in the chart which present a mixed picture. Is the glass half empty or half full?

Following the rally to the apparent top on the last trading day of 2004, the S&P index produced a three wave correction down to about 1170 (marked with a blue 4) in late January. Following that, there was a fairly sharp rally that culminated in a shooting star candlestick, and then two red decisive down reversal candlesticks, the second of which came on well above average volume, and closing near the low of the day. There were about 11 straight trading days that produced practically all lower lows and lower highs. The index bottomed on April 18th at just below 1140. The brief rally in late March through early April was quickly and decisively reversed on three increasingly higher volume higher percentage drops before reversing upward on a high volume strong decisive UP candlestick back to S&P 1160. Then there was a lower volume drop back to above 1140 on lighter volume than the previous trip on Thursday 28 April. On that day, Uncle Martin posted an article entitled, “Sell ‘em All!”

Of course this was followed by a relatively low volume rally back to almost 1180 where the 50-day moving average sat at resistance. As this article is being drafted on Wednesday night, we see that there were 4 straight days where S&P 1180 has served as resistance. A rough day on Tuesday reversed Monday’s rally and then some. And Wednesday produced a possible hangman candlestick. (To be bearish, a hangman requires confirmation with a red down candlestick the following day.) It is also relevant that the 20-day exponential moving average (shown) served as fairly decisive support on Wednesday.

To summarize, in the short-term there is resistance at 1180 and possible support at 1158 while we sit at 1171, roughly in the middle of the range. As of Wednesday evening there is not a good risk reward ratio in either the bullish or bearish direction in the short term.

Other features to note which, although not helping you call the day after tomorrow; may have relevance in the stock market’s intermediate term direction.

• We are working on an Investors Business Daily (IBD) “confirmed rally.” That is a high volume up day that has been confirmed with a similar “follow through” day which occurred when the market rallied on the Kerkorian GM tender offer news. This is bullish.

• There is a preponderance of “distribution” days since the apparent market top in March. These are down days with a higher trading volume than the previous trading day. This is bearish.

• The latest rally off of the “Sell ‘em All” article has come on decreasing volume. This is bearish. Although seemingly not correct in recent times, markets generally can decline on low volume, but it takes relatively high volume to push a market up in a sustainable manner.

• The blue line (1164) has been previously identified as a neckline of a possible head-and-shoulders reversal pattern. Yet the line was broken upside albeit on less than decisive volume. Watch for a break below that neckline which would be bearish, whereas if the former neckline serves as support, that would be bullish.

• The 5^th wave up, marked in blue, came without momentum confirmation, which is bearish. This is typical of 5^th waves in Elliott Wave theory (see RSI chart).

• The intermediate term shows lower lows and lower highs which is bearish in the intermediate term.

• The most recent rally is being led by generally low quality stocks and this is bearish, as I will describe below.

So to summarize the short and intermediate term picture of the S&P 500, the short term is a toss-up and the intermediate term is bearish.

Low Quality Leadership Characterizes Low Volume Rally

The Bullish Percent Index (BPI) is a popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. Bullish Percent levels that are above 70% are considered overbought, whereas levels below 30% are considered oversold. Strong buy signals occur when the Bullish Percent Index falls below 30% and then reverses up by at least 6%. Conversely, promising sell signals occur when it goes above 70%, and then reverses down by at least 6%. The most popular version of this chart is the NYSE Bullish Percent ($BPNYA) which is mentioned prominently in Thomas Dorsey's book, Point & Figure Charting. Traditionally, the Bullish Percent indicator is charted on a Point and Figure chart using a 2 point box size.

I review key stock market sectors to help get a “feel” for what’s going on in the markets. It also provides a completely non-biased perspective that can be valuable where opinions can sometimes get in the way of intelligent investing and the need to avoid fighting the tape. In the most recent rally of about 4% from bottom to top, you would think that there would be an increase in bullish percents. Yet in the key sectors tracked in Stockcharts.com, the bullish percents have barely moved as you can see in the charts below.

Nasdaq Composite

The Nasdaq composite has 37.37 of its stocks in bullish chart patterns off a high of 76% in January of 2004. It is working on a row of “O’s” and sits at the bottom of the row. The rally has not moved the bullish percent of Nasdaq composite stocks at all.

Consumer Discretionary

Consumer discretionary sits at the bottom of a row of “O’s” at about 47%. Again, no upward movement in spite of the rally.

S&P Financials

Although 64% of the stocks in the financial sector are bullish, the point-and-figure pattern is bearish, and in spite of the recent rally, the P-A-F chart has not even come close to producing a reversal to a row of “X’s.”

NYSE Stocks

Below is the P-A-F chart of NYSE stocks indicating that 55% of the stocks in the NYSE are in bullish P-A-F patterns. The bullish percent chart is at the bottom of a row of “O’s.” In spite of the recent rally, there has been no change in the bullish percent P-A-F chart.

The NYSE Bullish Percent Index chart has also flashed a “promising sell signal” when it dipped from the 76% level to the 70% level according to the methods described by Dorsey.

So why has the rally failed to produce any up or bullish reversal movement in the P-A-F bullish percent chart thus far? The reason is that the leadership has been stocks that are so far down on their luck that they need to run a while before they turn bullish in their P-A-F patterns. Typical of this rally leadership are Eastman Kodak and General Motors, two stocks that have had their paper downgraded to “junk” over the last few weeks.

“Junk Rally”

Today’s Market

It’s still a bull market in indecision. But away from the stock markets there is a possibility that some decisions were made today. The US dollar appears to have broken out of an upward sloping trendline. Does this mean that it will continue to shoot straight up? Maybe not, because it is short term overbought; however there’s no denying that it appears to head higher as it put out a long white candlestick today as it simultaneously punched through its 200-day moving average. It’s still in a bearish (default) point-and-figure pattern, yet if and when it touches 86 it becomes bullish.

Relative to precious metals, the dollar may be at the top of a trading range, but clearly it deserves attention as you can see in the chart of the US dollar to Central Fund of Canada, a closed end fund composed in roughly equal split of gold and silver bullion.

Is the strong dollar a result of the generally rosy economic conditions that are being trumpeted in the recent releases of government economic statistics? What says Doctor Copper? Prior to today, copper was forming an equilateral triangle with lower highs and higher lows. I don’t have the print of today’s action, but I do know that copper was down pretty substantially, and is probably below the lower trendline. Can demand be slackening, or is this just the strong dollar making copper appear cheaper in dollar terms?

Were any decisions being made in the bond market? Looking at the exchange-traded long bond, it appears that we are at short term resistance and just a few ticks below “conundrum” level. If it continues to rise with the Fed hiking short term rates won’t that make an inverted yield curve? Don’t the speculators playing the carry trade want to avoid the Fed talking down the long bond again? Stay tuned. If I made my living trading these things, I’d go short this ETF, with a stop out at a close above the lower resistance line, and an inter-day stop out at a tick above conundrum level.

Following is the intermediate term ETF. Strategically, this may run to resistance where it would be a good entry point on the bear side….with a stop out at a close above resistance.

In spite of today’s rally in the bond market after a healthy bounce the homebuilding stocks whip-sawed all those buyers of this low volume rally with a big red candlestick downward decisively back through its 50-day moving average.

The homebuilders did not confirm the bond market rally. Did the utilities?

The utilities didn’t confirm the bond market rally either. It could be making a wedge which if it breaks downside, would suggest a price objective in the low 130’s.

In summary, the bond market rally was not confirmed by the action in the homebuilders or the utilities.

Oil is right near the psychological $50.00 a barrel level.

Were all the economic good news and strong dollar and low oil and rallying bond market confirmed by the transports? Gosh no! This is a ladder reversal of the early May rally and most of that rally was given back.

I think a good economic mind could make a good case for the deflation scenario, at least in the short term.

That is (again). Interest rates down, commodities down, dollar up, gold down, Japanese stocks down (that correlate with interest rates see), and last but not least stocks down. Oh did I mention the ugly action in homebuilding stocks? It’s not confirmed yet because trendlines have not been decisively broken yet. But this scenario has my attention.

A personal note: I enjoy writing these articles and always welcome your feedback, especially this weekend. I will have a lot of time to contemplate what I want to do with my bright future while driving to Boston from Philadelphia to pick up my daughter, who is thriving in college.

Have a great evening.

Martin Goldberg

Copyright © 2005 All rights reserved. Martin F. Goldberg, MS, P.E. Market Analyst Expert Page Commentary Archive Email

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us