Skip to main content

Weekly Review - rally looking extended, time for a pause?

Major averages added over 6% this week despite the fact that there were only a couple of days when stock prices actually rose. Still, that was all markets needed to show yet another big weekly gain as this rally continues to drive stock prices steeply higher.

The biggest catalyst occurred on Monday when the Treasury provided details on the plan to remove toxic assets from bank balance sheets. Investors loved it, stocks rocketed upward and that positive sentiment helped carry stocks most of the week.

In terms of economic reports, investors accepted the 6.3% decline in GDP as better than expected and the usual 650,000 jobless claims as "in line". There was debate over whether housing is improving as seasonal factors and plunging prices are beginning to generate a few purchases here and there. Specifically, existing home sales in February rose 5.1% month-over-month and February new home sales increased 4.7% month-over-month. As many commentators, including Barry Ritholtz, often point out, the month-over-month numbers are seldom instructive; it is the year-over-year numbers that are important because the housing market is susceptible to such deep seasonality. Looked at from the year-over-year point of view housing is still deep in the doldrums with new home sales, for example, still down over 40% from February 2008. Furthermore, there remains more that 12 months of outstanding inventory that will continue to pressure new home sales. By no means are we out of the woods in the housing sector but investors are beginning to think things won't get much worse and indeed may only improve from here.

The Durable Goods report was another example of low expectations being exceeded to the up side. There was a decent new orders number reported and that was the major focus. Shipments and unfilled orders, however, continued to show declines but investors shrugged off those numbers as not sufficently forward-looking. With new orders registering the first improvement in any measure in the Durable Goods report for months, investors were happy to accept it as a sign that things are improving.

And so the rally continued further into short-term over-bought territory. This had the effect of boosting many of the indicators that we track and report as TradeRadar statistics. Let's take a look at this week's results.

TradeRadar Alert HQ Stock Market Statistics --

Each week our Alert HQ process scans over 7400 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.

SPY versus the market - Moving Average Analysis, 03-27-2009
OK, I would like to interpret this chart as unabashedly bullish but I'm afraid that there are extremes being reached that suggest a pullback is close. With more than 60% of all the stocks we evaluated above their 20-day moving averages we are now at the highest level since summer of 2008. The number of stocks above their 50-day MA is also rapidly increasing though it hasn't hit an extreme level yet; nevertheless, it would appear that prudence and caution are the appropriate watch words after such a quick run-up.

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.

SPY versus the market - Trend Analysis, 03-27-2009
Here again the readings are elevated. Though the number of stocks in up-trends hasn't quite exceeded the previous highest level, the number of stocks in down-trends has fallen to the lowest level we have seen since we began tracking these statistics over year ago. Once more, the interpretation is that a pullback is becoming more likely.

Conclusion --

Though the economy is still in recession, the feeling among investors for the last few weeks has been that we have reached a trough. I hope that's true but so far, most economic reports have only confirmed that the decline in indicators of economic health is slowing, not bottoming or improving. It may be easier to catch the falling knife now but for most longer-term investors, there is no good reason the chase this rally.

This coming week, we'll have a good number of new economic reports which might help confirm whether a bottom is being formed. We start off with Consumer Confidence, then the Case-Shiller Home Price Index, Chicago PMI, the ADP employment report, ISM Index, pending home sales, auto and truck sales, the weekly initial jobless claims number, factory orders, hourly earnings, the Nonfarm Payrolls and Unemployment reports and finally ISM Services.

In other words, we'll get the latest readings on housing, manufacturing, services and employment - pretty much everything that is economically important. If the majority of these reports come in better than expected we could see caution thrown to the wind and further stock price gains.

And don't forget, the G-20 are meeting this week. Discord and disagreement could be unsettling to the markets. On the other hand, it could all be dismissed as political posturing. Given how much the actions of Washington have impacted stock prices lately, though, this meeting could have greater influence than usual.

In the meantime, be careful about rallies inspired by end of month window dressing. There will be better buying opportunities soon enough.


Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Thursday Bounce: Trend Busters, Swing Signals and Trend Leaders for July 9, 2009

This is a quick post to announce that we have published Thursday's Trend Leaders, Swing Signals and Trend Busters at Alert HQ . All are based on daily data. Today we have the following: 72 Swing Signals -- A couple of days ago we had 35 signals, today we have twice as many. Happily, we now have 65 BUY signals, a mere 4 SELL Signals plus 3 Strong BUYs. Whoo-hoo! 56 Trend Leaders , all in strong up-trends according to Aroon, MACD and DMI. There are 18 new stocks that made today's list and 60 that fell off Tuesday's list. 48 Trend Busters of which 5 are BUY signals and 43 are SELL signals The view from Alert HQ -- Talk about mixed signals. If you look at our Swing Signals list you would think the market was in the middle of a big bounce. BUY signals are swamping the SELL signals and we even have a few Strong BUYs. Yes, there's a good sprinkling of tech stocks and tech ETFs but the distribution is pretty broad-based with a good number of different sectors represented, eve

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here: Contact us if you have questions or identify any new issues.