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Saturday, July 25, 2009

Break out or break down? Stocks approach extreme levels

Running late tonight. I'm all covered in polyurethane and joint compound from the multiple projects I'm working on around the house. Painful as it may be, progress is being made.

And so it was in the markets this week, also. Progress was made again despite a disappointment or two from a few tech stocks. Major averages were able to add another 4% or so to the previous week's 7% gains. Stocks now appear to be well overbought and ripe for a pullback. I've read recently, however, that there is still quite a bit of skepticism out there. A contrarian might think that suggests this rally might have a bit of gas left in the tank. And earnings season may still have a few positive surprises waiting for us.

So where are the markets today and where might they be going? We look for clues in some of the charts that follow.

The view from Alert HQ --

Charts of some of the statistics we track at Alert HQ are presented below:

The above chart, illustrating our moving average analysis, is leaning quite bullish. You can see a sharp downturn followed by an equally sharp upturn. Note that the number of stocks above their 50-day MA is extending its lead over the number of stocks whose 20-DMA is over their 50-DMA. We are closing in on roughly 80% of all stocks being above their 50-day moving average. We're not there yet, but we are certainly getting to kind of extreme levels that precede a pullback.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

Here again, the chart is quite bullish. It shows that more than half of all stocks are now in up-trends and a dwindling number of stocks are in down-trends. This chart is also approaching extreme levels.

Conclusion --

Sentiment is positive, earnings are decent considering the recessionary backdrop and economic reports have been reasonably benign. Why shouldn't stocks go up?

Technicians are pleased at the moves that have been made (some are even predicting another leg up) while those who rely on fundamentals are more skeptical (with some justification).

With the charts showing the market out of danger for the time being (though closing in on extreme levels), investors will need to see some follow through from earnings and economic reports.

Whereas last week was very light in terms of economic news, this week the pace picks up. We will see new home sales, consumer confidence, the S&P/Case-Shiller Home Price Index, durable goods, the Fed Beige Book, initial jobless claims, advance GDP, core PCE and the Chicago PMI.

We have a slew of earnings reports coming up, as well. So far, there has been a good percentage of companies beating lowered expectations. Will investors get impatient with that scam? Or will they continue to look on the bright side?

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