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Saturday, October 3, 2009

Weekly Review - sentiment worse than stock performance?

A second week of declining markets has investors questioning whether stocks have come too far too fast. A week of disappointing economic reports has bears saying "I told you so." Is the rally over?

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:

I look at this chart with mixed emotions. On the one hand, I am heartened that the number of stocks whose 20-DMA is over their 50-DMA (the magenta line) is holding up quite well despite two weeks of declines. On the other hand, with the significant drop in the number of stocks above their 50-DMA, I can't help but think that stocks will continue to drop until we see that magenta line dip more noticeably. After all, the odd situation where our magenta line stays up while the yellow line drops is the result of stocks falling precipitously and the fact that their moving averages now need to "catch up" with the recent moves.

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, I feel like the move isn't complete until the red line and the yellow line cross or at least touch. In other words, for this decline to play out fully and set up the next buying opportunity, we need to see still fewer stocks in up-trends and more stocks in down-trends.

Conclusion --

As things stand today, our statistics show stocks holding up better than can be expected after two weeks of selling.

But really, what should be expected?

The S&P 500 has fallen only 4.3% from it's recent high; not not a serious drop. Likewise, the NASDAQ 100 has only fallen 4.1%.

Sentiment, however, seems to have fallen off a cliff. After poor reports on employment from ADP, higher than expected weekly claims, a weaker Non-Farm Payrolls report, slumping consumer confidence, weaker than expected Chicago PMI and ISM Manufacturing reports, investors seem to have thrown in the towel.

So does one week of poor economic reports justify a bearish outlook and calls for a W-shaped recovery? It is unlikely that the economy will move up in a straight line just as it's unlikely stocks will move up in a straight line. Accordingly, it is premature to throw in the towel on this market.

This coming week has little in the way of economic reports but third quarter earnings will be due in a few weeks. As investors worry themselves this week with little data to chew on, stocks could continue to work their way lower. The charts above lead me to believe that the S&P 500 could easily fall below 1000 before a (hopefully) better than expected earnings season reignites the rally.

So if your outlook is short-term, watching support levels on the daily charts could easily push you into selling stocks very soon. If you have a little longer term outlook, look at the weekly charts. You will see that the upward-moving trend-line is still intact. So far, at least, there's no need to panic.

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