Sunday, May 10, 2009

Technical Update 17.09

Last week I was tracking the early traces of negative divergences between markets. Although the markets in general pushed higher throughout the week, those divergences are widening and are cause for concern to the bullish case. Separately, a number of market internal indicators I follow have begun to reach extremes in optimism.

The S&P finished up by nearly 6% on the week, bringing it within spitting distance of a previously mentioned resistance level between 940-950. As you can see from the chart below, the 200day EMA is just overhead, which is also close to the YTD high of 943 from back in early January. While I expect this resistance level to hold, bear in mind that there are additional resistance levels surrounding the 1000 area, and what I feel is the "point of recognition" at 1075 - which was the upward sloping trendline from the '02 lows that many were watching in late September when the markets gapped lower big time. Those targets are still in play.

Much of the upward movement in the S&P can be attributed to the outsized moves in the Banking Sector. The KBW Bank Index finished higher by 36%. No, that is not a typo. Thirty-Six. This obviously had to do with the fraudulent stress test results. I will have more on the bogus treasury sponsored advertising campaign later this week.

But as mentioned before, the Nasdaq failed to confirm the move higher this week and instead lagged significantly behind, barely finishing the week positive.

A look at the market internals should give one pause for further optimism. While overbought can become more overbought, betting on immediate higher prices is kind of like a blackjack player "hitting" on 19. The odds are not in your favour.

First up is the Put/Call Ratio. The 10 day MA has spent a fairly long period of time below the 1.0 mark and appears to be stalling - perhaps foreshadowing a drop in stocks.

Next is the Advance/Decline Ratio. The 10 day MA here has also avoided the normal tendency to oscillate within a range.

The Bullish Percent Index is calculated via point & figure charts displaying bullish characteristics. Typically, the index is contained by a maximum bullish reading of 75% on the upside. We are there already.

And lastly, the percentage of stocks currently trading above their 50 Day MA is sitting at an extreme level of 93.72%. That hasn't happened since 2003. As with all indicators of 'overbought' or 'oversold,' the condition can be worked off over time or via price. If stocks just consolidate their moves and go sideways for the next few weeks, that would be giving some very bullish signals - perhaps that price was ready to extend to the higher targets I mentioned above.

I have been wrongfully bullish on the US Dollar of late. Everyone and their dog have been talking about "the recent break in the dollar" and it would be hypocritical to ignore it. Indeed, it has broken its upward trendline from last summer as well as its 200 day EMA. It is also trading in near perfect inverse correlation with the stock market. So whether this turns out to be a giant fake-out or the real thing is to be determined. But my position remains that the other currencies that make up the Dollar Index are in no better shape and debt deflation will continue to put a premium on dollars. The technical picture requires, however, that I take a more neutral approach.

Housekeeping Notes:

I will be making my return to Vancouver next week. I am stopping over in London for a few days to see the sights on the way. I will try to get an update in at some point, but if there is no activity here for a few days, you will know why. A more regular schedule of articles will resume when I get settled back in. In the meantime, I invite you to explore the panel on the right hand side of the page for some fantastic daily reading material.

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.


Roger Jarema said...


Just want to discuss the emerging markets (particularly Asian) humongous outperformance so far. What do you think is behind it?

It surely seems something is amiss when exports in Asian countries (export-based economies) plunging by 40% yet they say the economy is going to be fine... and they decouple from the developed world. Could it be the new carry trades? All of the developed world (about 70% of global economy) has CB interest rates below 1.5%. It used to be Japan's own. This creates a huge carry trade pool.

Right now, the regions still offering high interest rates are the Asian ones. My relative from Indonesia just told me that the stock market trading values are twice the amount when it was at its peak before the global bust. I just don't think there's such a not-to-be-missed opportunity. Stock market is up 60-70% in 5 weeks.

Of course, the stories are that China is leading the developing world to decouple. You can't afford to tell ugly stories on newspaper headlines such as filthy developed-world carry trades. But oftentimes, the real story is not so rosy... at least that's what I learned very well during the last round of onslaught.

Your opinions, Matt?

Matt Stiles said...


I've written since late '06 when I started this blog that the "decoupling theory" is bunk. Their entire boom was a direct result of the easy credit induced western demand. Yes, their savings rates are higher, which will provide a springboard for a rebound. But they will require a complete reworking of the base of their economies away from exports and more toward domestic consumption. Investing in factories to export trinkets to the US is not going get a return on capital.

Most of Asia is approaching a generational "crisis era" which likely means that their excess productive capacity will be utilized for something other than trinkets (war), and then eventually be destroyed.

I'm more optimistic on South America. But only before they get sucked down with the rest of the world.


View My Stats