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Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

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Technical Market Report

The good news is:

  • There have been virtually no new lows on either the NYSE or NASDAQ.
  • Many of the indicators are about as low as they have been at any time since the rally began last March.
  • The market remains in a seasonally strong period, at least for the first part of next week.

Market tops develop relatively slowly. Part of that development includes a build up of new lows. There has been a rule of thumb that says there is little risk until new lows exceed 40 for several days. That rule of thumb has held up well since the 60's in spite of the number of issues more that tripling over the same period. Last week the number of new lows on the NYSE peaked Wednesday at 8 while NASDAQ new lows peaked Thursday at 10.

New highs hit their lowest levels in quite a while last Thursday at 118 on the NYSE and 77 on the NASDAQ. Several successful intermediate term timing systems have no sell filters based on a 10% trend of new highs. When the value of the 10% trend of new highs is above a specified setting, no selling is allowed. These filters are usually based on NYSE new highs and an aggressive level would be around 100 while a conservative level would be around 130, i.e. if the value of the 10% trend of new highs is above 100-130 no selling is allowed. The current level of the 10% trend of NYSE new highs is 367 and NASDAQ new highs is 240. If there were no new highs it would take those indicators several weeks to get down to levels that would permit selling.

The chart below shows momentum of (upside volume / upside volume + downside volume) of the component issues of the Russell 2000 (R2K). The indicator is near its lowest level since the rally began last March. From extreme levels like we currently see, the indicator has been good at identifying short term bottoms. It has not turned yet, but, one strong day will take care of that.

The next chart shows the percentage out of the previous 4 trading days an advance - decline line constructed from the component issues of the R2K has been up. The indicator reaches the top of the chart when there have been 4 consecutive up days and the bottom of the chart when there have been 4 consecutive down days. The indicator is at the bottom of the chart for the fifth time since the rally began in March. The previous 4 have been starting points for significant rallies.

The next chart shows momentum of (advancing issues / advancing issues + declining issues) of the S&P 500 (SPX). Like the previous charts the indicator is near its lowest level since the rally began.

The charts above are typical of the most of the charts I looked at. The indicators are at or near the lower end of their ranges since the rally began in March and they have not yet turned around. A turn is likely in the next day or two and the rally should be tradable.

As you can see in the tables below, we remain in a seasonally strong period through Wednesday. Seasonality did not help last week, but now the market is clearly oversold, which should help next week.

First five trading days of February.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
The number following the year is its position in the presidential cycle

R2K Day1 Day2 Day3 Day4 Day5 Totals
1989-1 0.34% 3 0.36% 4 0.48% 5 -0.07% 1 0.81% 2 1.93%
1990-2 0.72% 4 1.06% 5 0.57% 1 0.01% 2 0.86% 3 3.22%
1991-3 0.92% 5 1.83% 1 1.38% 2 1.39% 3 -0.79% 4 4.72%
1992-4 0.34% 1 0.95% 2 0.73% 3 0.42% 4 -0.07% 5 2.37%
1993-1 0.41% 1 0.29% 2 0.98% 3 0.17% 4 -0.80% 5 1.05%
1994-2 -0.01% 2 0.42% 3 -0.02% 4 -2.21% 5 0.00% 1 -1.81%
1995-3 0.26% 3 0.45% 4 0.87% 5 0.66% 1 0.21% 2 2.46%
1996-4 0.62% 4 0.13% 5 0.23% 1 0.53% 2 -0.23% 3 1.27%
1997-1 0.07% 1 -0.38% 2 -0.77% 3 0.00% 4 0.35% 5 -0.73%
1998-2 1.02% 1 0.78% 2 0.92% 3 0.50% 4 0.32% 5 3.54%
1999-3 -0.27% 1 -1.02% 2 0.47% 3 -1.40% 4 -1.21% 5 -3.43%
2000-4 1.52% 2 1.22% 3 2.30% 4 0.75% 5 1.31% 1 7.09%
2001-1 0.13% 4 -1.56% 5 -0.06% 1 1.00% 2 0.26% 3 -0.23%
2002-2 -0.63% 5 -2.07% 1 -0.27% 2 -1.37% 3 -0.87% 4 -5.21%
2003-3 -0.52% 1 -0.41% 2 -0.47% 3 -0.61% 4 -1.63% 5 -3.65%
Averages 0.33% 0.14% 0.49% -0.02% -0.10% 0.84%
Winners 73% 67% 67% 60% 53%  
 
SPX Day1 Day2 Day3 Day4 Day5 Totals
1989-1 -0.13% 3 -0.08% 4 0.04% 5 -0.31% 1 1.21% 2 0.73%
1990-2 -0.09% 4 0.65% 5 0.28% 1 -0.66% 2 1.24% 3 1.42%
1991-3 -0.26% 5 1.54% 1 0.84% 2 1.94% 3 -0.43% 4 3.63%
1992-4 0.18% 1 1.05% 2 0.00% 3 0.00% 4 -0.66% 5 0.57%
1993-1 0.85% 1 0.01% 2 1.05% 3 0.53% 4 -0.14% 5 2.30%
1994-2 -0.41% 2 0.50% 3 -0.27% 4 -2.27% 5 0.42% 1 -2.04%
1995-3 0.00% 3 0.51% 4 1.24% 5 0.52% 1 -0.07% 2 2.19%
1996-4 0.38% 4 -0.41% 5 0.88% 1 0.76% 2 0.56% 3 2.17%
1997-1 0.07% 1 0.32% 2 -1.39% 3 0.24% 4 1.21% 5 0.45%
1998-2 2.14% 1 0.47% 2 0.09% 3 -0.33% 4 0.89% 5 3.26%
1999-3 -0.52% 1 -0.86% 2 0.80% 3 -1.85% 4 -0.73% 5 -3.17%
2000-4 1.06% 2 -0.01% 3 1.12% 4 -0.04% 5 -0.01% 1 2.13%
2001-1 0.55% 4 -1.75% 5 0.36% 1 -0.15% 2 -0.84% 3 -1.83%
2002-2 -0.71% 5 -2.47% 1 -0.40% 2 -0.60% 3 -0.31% 4 -4.49%
2003-3 0.54% 1 -1.41% 2 -0.54% 3 -0.64% 4 -1.01% 5 -3.07%
Averages 0.24% -0.13% 0.27% -0.19% 0.09% 0.28%
Winners 53% 53% 67% 33% 40%  

Unlike last week, next week is more typical of seasonally strong periods in that the secondaries are normally stronger than the blue chips. It is notable that, for the past three years, seasonality has not helped the first week of February.

The current oversold condition along with help from seasonality leads me to expect the major averages will be higher at the close Friday February 6 than they were at the close Friday January 30.

Last weeks forecast was another spectacular miss further enhancing my reputation as a contrary indicator.

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