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Monday, November 23, 2009

Rising tide fails to lift all boats - what happens now when the tide goes out?

Though the primary trend of the market continues to be up, the last few days had an ugly feel to them. Stocks encountered significant selling pressure on Thursday and on Friday the dip buyers were noticeably absent.

So have stocks topped out again? If so, is it a pause in the uptrend or something more?

The view from Alert HQ --

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

This first chart tracks our moving average analysis. The count of stocks above their 50-DMA (the yellow line), hit its most recent low a month ago at the end of October. Since then this count has rebounded. The last two days of this week, despite the sell-off in stocks, hasn't had much of an effect. Yet...

So far about 50% of the roughly 7200 stocks and ETFs that we evaluate each weekend are still above their 50-DMA. In what may portend further declines to come, we see the magenta line which tracks the number of stocks whose 20-DMA is above their 50-DMA continues to weaken. This shows a steady increase in the number of stocks whose short-term trends are no longer bullish and are heading for that bearish the cross-over below the 50-DMA.

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.

This chart is in an odd state. Since we started tracking these numbers back in February 2008, we have usually seen that one indicator is up while the other is down. What we are seeing now is that both indicators are at historically low numbers. This suggests we have a market that is not trending at all but is stuck in a range. If you look at a chart of the major indexes like the S&P 500 or the NASDAQ Composite, you would think we are in a clearly UP-trending market. What the chart above is saying is that some sectors of the market may not doing all that great.

As confirmation, take a look at the weekly chart of the Russell 2000, below:

The Russell 2000 is still in a primary up trend; however, recent price action has been choppy and the index has failed to make a new high. Contrast the Russell 2000, an index of small-cap stocks, with the following weekly chart of the S&P 500:

The S&P 500 is clearly in an uptrend that has been virtually uninterrupted. It is easy for investors following this index to think that the entire market is doing quite well when in actuality, a selection of large-cap stocks are the ones doing well.

Conclusion --

Our statistics suggest that market tone is changing. Whereas it seemed that the rally of the last six months represented the rising tide lifting all boats, now it appears that some boats are more buoyant than others.And at the moment, a lot of boats are taking on water.

Furthermore, there is a definite change in the markets. The current uptrend is losing steam and according to our trend analysis we are beginning a period of treading water. A more worrisome interpretation, however, is that stocks are at a unique point of equilibrium where the upward momentum has gone to zero and the downward momentum has not yet begun to pick up. In mathematical terms, both the first and second derivatives have gone to zero.In more common parlance, we're at a tipping point.

Tides, boats and tipping points - too many metaphors to get a clear idea of where this market is going. This is a good time to exercise caution.

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