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Saturday, August 23, 2008

Weekly review - stocks hit the brakes

Major averages gave way this past week. Losses seemed rather modest but the underlying data is starting to look very suspicious. Yes, we had a big rally on Friday but our data shows a real slowdown in upward momentum.

We use both daily data and weekly data collected from the Alert HQ process to compile the market statistics discussed below. Each weekend we scan over 7200 stocks and ETFs looking for BUY and SELL signals. In the process, we collect various technical information that we roll up into charts like the ones below.

Stock Market Statistics based on Daily Data, 08-22-2008
The chart above is based on daily data. It clearly shows that many stocks have fallen below their 20-day and 50-day moving averages. It also shows that more than a thousand stocks are no longer exhibiting strong up-trends according to Aroon analysis. The number of stocks showing strong buying pressure according to Chaikin Money Flow analysis showed a small decline.

So is this merely a pause in a major up-trend? For the optimists, we can point to the fact that we don't have a big increase in stocks exhibiting strong down-trends according to Aroon. The number of stocks whose 20-day MA is above their 50-day MA actually showed a very slight increase.

Stock Market Statistics based on Weekly Data, 08-22-2008
In the chart above we show the results of analysis based on weekly data. As can be expected, the data on weekly charts is slower moving and smoother than what we see on the charts based on daily data. Nevertheless, the action in this past week did show a similar slowing of momentum. Analogous to what we saw in the first chart, we have a decrease in the number of stocks trading above their 20-week and 50-week moving averages. In addition, we see the number of stocks exhibiting strong up-trends according to Aroon analysis has failed to show any increase.

In summary --

Our data has shown market internals improving for some time now but this past week it looks like someone hit the brakes. The number of stocks exhibiting bullish technical characteristics showed a noticeable decrease.

Nothing goes up in a straight line so it's possible that last week was just a detour on the way to a stronger market recovery. On the other hand, there are strong signs that stocks have reached an intermediate high.

This past week was light on data and light on volume. This week we have plenty of potentially market-moving data on tap. We will see existing home sales and new home sales, the revised 2nd quarter GDP, durable goods orders, Chicago PMI, University of Michigan consumer sentiment and the weekly numbers on initial claims and crude inventories. All this during a pre-holiday week that typically exhibits low volume.

The combination of low volume, lots of data and slowing momentum could make this a wild week for investors. This might be a good time to pull over to the side of the road and let the more venturesome drivers pass.

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