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Sunday, September 21, 2008

Weekly Review - Markets go from hopeless to hopeful

Wow, what a week we have just been through! It looked like the wheels were really coming off before the government rode in to the rescue and the markets turned on a dime.

Barrels of ink and gigabytes of pixels have been expended writing about Lehman declaring bankruptcy, Merrill selling itself, the near demise of AIG, the announcement of a systemic bailout plan and the other events of the week so I won't repeat them here in any detail. Suffice to say, all the major averages save the Dow Industrials managed to end the week higher. Mid-caps notched a 2.1% gain over the prior week and small-caps zoomed up 4.6%.

I will limit myself to presenting a few of the market statistics that we track. Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. The following chart based on daily data summarizes the state of our technical indicators:

Stock Market Statistics, 9-19-2008
Moving Average Analysis --

Despite the strong rallies on Thursday and Friday, our indicators continue to paint a dismal picture of the market. Though we had a modest increase in the number of stocks that are above their 20-day moving average we only had a very small increase in the number of stocks that are above their 50-day moving average. As a sign of the market's overall health, I like to track the number of stocks whose 20-day MA is above their 50-day MA. That indicator continued its downward path again to make it three weeks in a row of declining values.

Trend Analysis and Buying Pressure --

As for the trend indicators, there has been no respite. We use Aroon analysis to generate our trending statistics. This week saw another increase in the number of stocks in strong down-trends and another decrease in the number of stocks in strong up-trends.

We use Chaikin Money Flow to track buying and selling pressure. This week we saw a nice uptick in the number of stocks exhibiting strong buying pressure.

S&P 500 Sector Analysis --

Below we present our sector analysis for the S&P 500. We have looked at three characteristics:
  1. Percentage of stocks in a sector whose Aroon analysis indicates they are in an UP trend
  2. Percentage of stocks in a sector whose DMI analysis indicates they are in an UP trend
  3. Percentage of stocks in a sector that are trading with their 20-day moving average above their 50-day moving average.
S&P 500 Sector Analysis, 9-19-2008When all was said and done, this week's volatility didn't drastically change the picture in our sector analysis from how it has looked for the past few weeks. We do see a slight bullish stirring in Energy. Consumer staples continues its leadership. Financials certainly perked up and Technology showed some improvement.

In summary --

Stocks have definitely improved with the powerful rallies of Thursday and Friday. What is striking, though, is that it didn't make that much of an impact on our indicators. Two days of good gains have not been enough to significantly move the needle and it goes to show how beaten down stocks were prior to the rally.

Since our indicators use data averaged over time, it will take continued positive action in the markets before the indicators sound an "all clear". Indeed, the Dow, the S&P 500 and the NASDAQ are all still below their 50-day moving averages with the NAZ still below its 20-day MA. The 200-day MA is commonly thought of as an indicator of a bullish trend. Except for the Russell 2000, they all have quite a way to go before they attain that milestone.

In any case, the tone of the market is now hopeful rather than hopeless. If Congress and the Treasury can agree on a plan quickly it will go a long way toward restoring health to stocks. Still, this market is fragile and I wonder what prolonged debate will do to the currently positive sentiment among investors. I am not so sure this is going to be a V-shaped bottom.

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