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Saturday, October 30, 2010

Weekly Market Update -- things get shakier still

Last week I wrote a post titled "Weekly Market Update - cracks in the foundation?". It was the first time in quite a while that I had written one of these posts that presented TradeRadar statistics and reviewed what those statistics might be saying about the state of the market.

Last week I voiced my worry that breadth was was deteriorating and that, sooner or later, this would have a negative impact on the progress of the current rally. Though stocks managed to eke out another gain this past week, the underlying situation has not improved. If anything, it has gotten worse.

The view from Alert HQ --

For those readers who are new to TradeRadar, the data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).
SPY vs the market - Moving Average Analysis, 10-29-2010

The negative cross-over on this chart, where the number of stocks above their 50-DMA has declined below the number of stocks whose 20-DMA is above their 50-DMA (yellow line crosses below magenta line), has continued for the second week in a row.This confirms the fact that the majority of stocks are in the process of slowing down or slipping. It also confirms my worried disposition in last week's post.

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.
SPY vs the market - Trend Analysis, 10-29-2010

In this chart too, we see the previous week's deterioration continue to get worse. The number of stocks in strong up-trends is still declining and the number of stocks in strong down-trends is continuing to increase.

Conclusion -- 

Even as major averages continued to show week-over-week gains, the statistics we track show the foundations of this rally getting shakier and shakier. Moving averages are weakening and trends are loosing their vigor.

Last week I said that you should feel no pressure to buy stocks right now in fear of being left behind by the market. It now looks even more likely that a pullback is beginning to unfold. This feels like a time when the best course to minimize risk is to just stand back, keep your powder dry and populate your watch list. And of course I invite you to find those watch list candidates at Alert HQ and the new Alert HQ Premium.

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