Indicator Update for September 29th

Last week's indicator review found weakness prior to the sharp burst of buying that greeted initial news of a government rescue plan. Since that time, wrangling over the plan and doubts about its efficacy in the face of growing bank failures have led to further market and indicator weakness. As noted earlier, sectors are largely in a range bound mode and money flows have remained negative. This supports the point from last week that the buying we've seen has largely represented sector reallocation and short covering rather than a sustained commitment to equities.

With the week's selling, the Cumulative Demand/Supply Index (top chart) fell from a very modestly overbought level to a very modestly oversold one. This is also consistent with a range bound market. When markets put in an important bottom, the Cumulative DSI normally moves sharply and steadily higher. The inability of stocks to sustain positive momentum--which is what the DSI measures--suggests that we may still be waiting for such a bottom.

We also saw weakness in the new 65-day highs minus lows (middle chart), with over 1000 stocks making fresh 65-day lows on Friday. I will be watching this indicator very closely for divergences or confirmations on tests of recent market lows; as long as the number of stocks making new lows is expanding, I am not taking long trades for anything other than a very short-term, intraday position.

Note, too, that the Cumulative NYSE TICK line (bottom chart) has also been hovering in a range, not far off its recent lows. (This is also true of the advance-decline line specific to NYSE and SPX stocks). The messages from the Cumulative TICK, money flow, and DSI measures are unanimous: we are not yet at the point where we are sustaining buying, which is what we need to see to put in a durable market bottom.

To be sure, the divergences noted in recent posts--most evident in the new high/low figures--remain; the list of stocks making fresh annual lows has been shrinking during 2008. While this is necessary for a market bottom, it is not--in itself--sufficient. Until we see increased buying among institutions, as measured by NYSE TICK, money flows, and broad strength in the other indicators, it is premature to conclude that the bear is ready to hibernate.
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