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Weekly Technical Commentary by Art Huprich

Bifurcation!

The major averages closed down yesterday but well off their session lows after a series of mixed economic data was released. “The CPI data were a little higher than expected while residential construction figures surprised to the downside,” was Chief Economist Dr. Scott Brown’s opening line in his daily update. At the final bell, the DJIA fell 11 points; the NASDAQ lost almost 11 points. On the NYSE, volume expanded to 1.06 billion shares. There were 258 net declining issues. The Oversold – Overbought Oscillator closed at + 6.8.

From my view point, a dichotomy exists within the current condition of the stock market. The DJIA [(10426.31) – very near-term support = 10171 and approximately 10100], S&P 500 [(1109.80) – very near-term support is approximately 1100 to 1084], and NASDAQ [(2193.14) – very near-term support = 2145] each recently recorded a new reactionary high. This indicates Wall Street’s focus on large cap stocks – growth versus value is “50-50,” meaning the relative price trend of big cap growth versus big cap value is not favoring either area. Also, we have now been overbought for a week, based on the Oversold – Overbought oscillator. A market that stays overbought without correction is viewed as “strong.” Working on the other side of this, a number of breadth and momentum indicators have not yet confirmed the new reactionary highs. Also, the small and mid-cap stock market indices, as defined by SML and MID respectively, haven’t recorded new reactionary highs.

Thus, while the big cap area of the stock market is “in-gear,” the stock market as a whole is bifurcated. Consequently, based on an account’s objectives and tolerance for risk, I continue to advise 1) tightening stops, especially against positions that are extended, and 2) hedging, reducing, or selling positions in which the actual or relative price trend is poor or weakening.

A good example of the split nature of the stock market is that while the big cap area of the stock market is moving higher, the small cap arena, as defined by the Advance Decline Line of the Small Cap 600 Index shown below, is peeling away to the downside.

Chart courtesy of Raymond James Research

In view of this, I’ll repeat my recommendation from a few days ago: “As a hedge against long stock exposure – proactive accounts only that will use $45 as a stop-loss point – consider buying the Short Russell2000 ProShares (RWM/$46.41).” As always, please first call Closed End Fund Research in order to make sure this is consistent with an account’s objective.

Wednesday Morning 11/18

Here are the most recent weekly BULL - BEAR investment newsletter advisory sentiment figures and a paraphrase of a portion of their comments, published by Investors Intelligence:

After a brief but scary correction, stocks ended their second consecutive week of gains last Friday. The latest correction caused a notable jump in the BEARS last week, but the strong gains that followed dropped them down sharply to a multi-week low (emphasis mine).

The BULLS rebounded to 46.1%. The mid-October high saw their number at 49.5%, and in September and August, the bulls exceeded 50% at the index peaks. That shows the advisors are still not as enthusiastic as they had been at prior trading highs. The BEARS fell rather sharply to 21.3%. We again see bearish advisors near their low reading of 19.8% from August. Advisors classified as CORRECTION rose to 32.6% from 28.9%. This group is mostly bullish, but they expect an intervening market retreat before the rally begins. They look to buy on dips. Again we see lots of indecision amongst the advisors. Their reluctance to show outright bullish opinions should allow still higher market levels in the near term.

Relative to yesterday’s tape action, the bulls flexed their muscles as stocks rallied in the final hour of trading, sending stock market indices higher – even as the US Dollar Index rallied! The DJIA (10437.42) gained 30 points; the NASDAQ (2203.78) rallied six points. The DJIA, S&P 500 (1110.32), and NASDAQ are all at new reactionary highs, indicating Wall Street’s focus on large cap type stocks. Very near-term support is as follows: SPX approximately 1100 to 1084, DJIA = 10171 and approximately 10100, NASDAQ = 2145

Since March, there has been an inverse relationship between the U.S. Dollar and the stock market. Now that the media gets worked up into a frenzy everyday about this relationship, I receive frequent inquires as to the trend of the U.S. Dollar.

Shown on page two is a chart of the U.S. Dollar Index (you can get a chart at stockcharts.com). The trend is obvious. What I will point out is that

Support is trying to develop in the area of 75 to 74.

It will take a close above 76 and, even more so, above 77, to indicate a positive short-term change in trend.

When the trend migrates from down to sideways and ultimately up (point #2), please call Closed End Funds Research for various ways to take advantage of the trend change.

Chart courtesy of Thomson Reuters

Tuesday Morning 11/17

Taking their cue from the shuttle Atlantis, which vaulted into orbit yesterday, and despite a pullback after Meredith Whitney came out with some “warnings,” stock market indices also “vaulted.” At the close, the DJIA (10406.96) gained 136 points; the NASDAQ (2197.85) gained 30 points. On the NYSE, volume expanded to 1.14 billion shares. There were 1,920 net advancing issues, another excellent reading. According to my figures, the traditional NYSE A – D Line still needs to register over 800 net advancing issues in order to record a new reactionary high. Until then, the breadth non-confirmation still exists! There were 318 new 52-week highs, a pickup from recent readings but still below its most recent high reading of 462 registered on 10/14/09. The Oversold Overbought oscillator closed at + 8.3 and is deeply into overbought territory. A failure on the part of the stock market to respond negatively (pullback) to a consistent string of overbought readings is actually a sign of strength. Let’s watch this closely.

I made the comment yesterday that the current stock market environment is getting more selective. This implies a more focused discipline on managing stock-specific risk along with where and how you put “dollars” to work. Yesterday was another example of this observation. While there were all sorts of chatter about new highs by the stock market indices (they weren’t new highs but new reactionary highs – there is a big difference), “participation is still narrowing. This is evident by the chart below.

While the price trend is “higher” for a select number of stock market indices [more on this in upcoming reports as the S&P 500 (1109.30) completed a short-term bullish cup & handle continuation pattern yesterday] and individual stocks, consistent with the statement in paragraph two about the stock market getting more selective, let me please reiterate what I suggested yesterday, namely:

“Performance anxiety” and job security on the part of under-invested money managers, coupled with the normal seasonal stock market strength seen in November and December (end of year demand), may lead to a positive resolution of this concern of mine... In the meantime, the current trading and investment environment is getting much more selective. I suggest taking the same stance. Also, based on the client, hedge or sell stocks with negative or weakening actual or relative price trends.”

Monday Morning 11/16

Friday the 13th failed to live up to its reputation as stocks ended with moderate gains Friday, yet off their best levels. Interestingly, stock market indices absorbed a growing trade deficit and a drop in consumer sentiment. At the final bell, the DJIA (10270.47) gained 73 points; and the NASDAQ (2167.88) rallied 19 points. Gold and networking stocks exhibited good relative performance Friday. The Bank index closed lower. For the week, the NASDAQ, up 2.6%, outperformed. The DJIA climbed 2.5%, the S&P 500 rose 2.3%, and the Russell 2000 underperformed, up 1%.

On the NYSE, volume contracted to 985 million shares. There were 1,393 net advancing issues, an excellent reading relative to the DJIA. The Oversold – Overbought oscillator closed at + 6.9. The Index Put-Call ratio that I follow (please recall this is a secondary, contrary sentiment indicator) closed at a very bullish 294%. This implies extreme skepticism of last Friday’s rally and, when it comes to the stock market “climbing a wall of worry,” suggests the wall is high. Please realize this is options expiration week, which, in the past, has lent itself to increased intraday volatility.

I mentioned Friday that a few different “non-confirmations” existed and was asked: “What does a breadth (advance – decline) non-confirmation look like, especially since it last occurred during the summer of 2007?” Consequently, shown below is a chart of the DJIA and NYSE Advance – Decline Line (A-D). You can view the A-D line in Investor’s Business Daily newspaper.

Before viewing this relationship let me please add (as I have said since this breadth non-confirmation first developed) the following: “Performance anxiety” and job security on the part of under-invested money managers coupled with the normal seasonal stock market strength seen in November and December (end of year demand) may lead to a positive resolution of my concern. However, if it fails to do so, it is usually a precursor of bad things to come.

In the meantime, the current trading and investment environment is getting much more selective. I suggest taking the same stance also, based on the client – hedging or selling stocks with negative or weakening actual or relative price trends.

Chart courtesy of Thomson Reuters.

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