Indicator Update for October 26th

Last week's indicator review concluded, "What this means is that we could see more broad, range-bound, whippy action as markets seek an intermediate-term bottom. Unless I see breakout strength in such indicators as money flow, NYSE TICK, and new highs/lows, my leaning will be to fade sharp market rallies, but also to fade tests of recent lows that are accompanied by non-confirmations in these indicators." We certainly did see the volatile, whippy action during the week and a seeking of a bottom by week's end. Did we see the non-confirmations that would lead us to believe, however, that we are near a bottom? The evidence, we shall see, is quite mixed on that score.

We continue to be oversold in the Cumulative Demand/Supply Index (bottom chart), which, if you recall, is a cumulative line of a daily index that compares the number of stocks closing above their volatility envelopes and those closing below. When we see persistently low Cumulative DSI numbers, it means that stocks are persistently closing closer to their lower envelopes than their top ones. That is a clear sign of broad market weakness, since the Cumulative DSI assesses all stocks traded on the NYSE, NASDAQ, and ASE. (I update the Demand/Supply numbers each weekday AM via the Twitter app, so that you can track emerging strength and weakness).

This indication of broad weakness is supported by the advance-decline line for NYSE common stocks, which has been making fresh bear market lows through the past week, as well as by the persistently weak money flows for the Dow industrial stocks. As I noted during the week, 38 of the 40 stocks I follow in my basket of highly weighted S&P 500 stocks across eight sectors are trading in downtrends based upon my Technical Strength measure. This is not what I'd look for in a market in which selling is drying up.

To be sure, the number of stocks making new lows vs. highs (top chart) were lower this past week than two weeks previous. Still, this number is quite elevated. For example, Decision Point reports that 228 of the 500 S&P large cap stocks made fresh 52-week lows on Friday. Among the 600 S&P small cap issues, 250 made fresh annual lows; among NASDAQ 100 stocks, fully 59 made new 52-week lows. While I'm making note of the divergences with respect to the number of new lows from two weeks ago, enough stocks continue to behave in weak ways to make me want to see confirmation of fresh buying interest before taking intermediate-term long positions in stocks.

I recently noted the weakness in the corporate bond market, particularly in the high-yield sector. This is important, because the current crisis is first and foremost a credit market event that has spilled over into the broad economy and affected stocks. As long as the credit markets continue to make new lows, it will be difficult to sustain a bull move in stocks. I am watching several market themes--corporate fixed income weakness, Treasury strength, U.S. dollar and yen strength, and commodity weakness--as a way of assessing likely moves in stocks. We'll need to see a reversal in those themes to begin any kind of bottoming in stocks.
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