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Sunday, April 5, 2009

Weekly Review - indicators at extremes

Another great week with the stocks on the upswing! It's certainly pleasant to see multiple weeks of follow-through but can it be true that suddenly all is well?

On the plus side this week, investors welcomed the decision by the FASB to ease market-to-market rules. The ISM manufacturing index came in slightly better than expected and so did pending home sales. Construction spending declined less than expected. The expectations portion of the Consumer Confidence survey indicated people were a bit more hopeful than they were last month.

There were negatives this week but, for the most part, they were ignored. The ADP employment report was horrible but investors shrugged it off. This set the stage for an equally horrible Non-Farm Payrolls report that was also shrugged off because it was considered to be "in line". Whether or not it was in line or out of line, it would seem to me that the importance of an 8.5% unemployment rate shouldn't be underestimated in a consumer driven economy. Nevertheless, the attitude now is that employment is a lagging indicator so continued increases in unemployment can safely be ignored.

Well, maybe that's true and maybe it's not. It does seem that things are going to hell in a handbasket at a slower pace than we saw over the course of the last 12 months. Does that mean it's safe to rally? Most investors seem to think so. I like David Fry's comment that, as a technician, he's long stocks while holding his nose.

We also track a lot of technical indicators and we try to publish a summary every weekend. Here is what our statistics look like this week.

TradeRadar Alert HQ Stock Market Statistics --

Each week our Alert HQ process scans almost 7300 stocks and ETFs and records their technical characteristics. Primarily we look for BUY and SELL signals for our free stock alerts; however, we also summarize the data in order to gain insights in the week's market action. The following charts are based on daily data and present the state of some of our technical indicators.

This first chart presents the moving average analysis for the entire market and contrasts it with the performance of the S&P 500 SPDR (SPY). When the number of stocks trading above their 50-day moving average (the yellow line) crosses the line that tracks the number of stocks whose 20-day moving average is above their 50-day moving average (the magenta line) there is an expectation that you will get a change in the trend of the S&P 500.

Does this look overbought on a short-term basis? Look at the number of stocks above their 50-day moving averages. This is a record high since we started keeping track over 13 months ago. The number of stocks whose 20-day MA is over their 50-day MA has also surged. This is a picture a market with very strong upward momentum. Can stocks keep up this pace?

This next chart is based on Aroon Analysis and compares our trending statistics to the performance of SPY. We use Aroon to measure whether stocks are in strong up-trends or down-trends. The number of stocks in down-trends is indicated by the red line and the number of stocks in up-trends is indicated by the yellow line.

Here again we see our indicators moving to extremes. This is the lowest number of stocks in down-trends we have recorded since we began keeping track. Similarly, we are also seeing a record in the number of stocks in up-trends.

This next chart shows how the sectors in the S&P 500 are doing. It's been a while since we have shown this chart since pretty much all the sectors were in toilet. Now, however, most sectors have more than recovered.

All the speculative sectors are now soaring and all the defensive sectors are lagging. This looks more like a market peak rather than an early recovery from a historic low.

Conclusion --

Nothing goes straight up and nothing goes straight down.

The market has essentially been going straight up lately. Can it continue? History would seem to say no. All the indicators, including ours, show that stocks are in a short-term overbought status. And this is despite the fact that the world economy is still clearly ailing.

Conversely, the U.S. economy has been going straight down for months now. These last few weeks, however, there have been some slight signs of improvement. Are these signs just noise in what remains a negative trend? Can the injection of trillions of dollars of government money put things right?

I keep expecting stocks to take a breather but instead they keep sprinting higher. Even a stopped clock is right two times a day so I suppose, at some point, there will be a pullback. In the meantime, bears would do well to stand aside and bulls might do well to reduce winning positions and take a few profits.

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