Not Overbought Yet, But Wait A Couple Of Hours

08/08/08 3:00 PM EST

I've received a slew of questions this afternoon regarding our most sensitive indicators, which haven't moved much towards overbought territory despite the large gains in the major indices.

The reason for their (lack of) movement is that component indicators like the Cumulative TICK and Price Oscillator take into account trading activity over the past day, and "days" are counted in terms of intraday bars, not in terms of calendar days.

That means that one trading day would go from, for example, 2:00pm yesterday through 2:00pm today.  Which means that the indicators are still harboring readings from yesterday afternoon, which was ugly, and it's helping to keep a damper on the indicators cycling into overbought too quickly today.  As yesterday's readings drop off, if we continue to hold up and rally into the close today, then we should see the intraday indicators cycle very quickly towards or into overbought territory.

So far the breakout attempt looks pretty solid.  The major indices are above prior resistance levels and holding well, breadth is heavily titled to the upside as we're hovering near a 75% ratio of advancing to declining issues, and we're seeing most of the qualities of a trend day that tends to lead to a close at or near the day's high.  In one fell swoop, the markets have met their usual upside reaction seen from the start through the end of the Olympic Games.  Nike, which as we discussed this morning has had a tendency to behave very well during the Games, has already jumped nearly 4% today.

The Nasdaq 100 had a picture-perfect bounce off of that 1880 level we were watching yesterday, and with a move to post-July 15th highs today, the intermediate-term picture continues to look good.  We're obviously not going to be able to keep up this pace much longer, and we've seen a nasty pattern of big up days followed by big down days and vice-versa, but as long as the levels we went over this morning aren't violated, I don't see any reasons to be too quick to fade this rally.

08/08/08 9:00 AM EST

Good Friday morning...We begin the day with a muted reaction in the pre-market futures as we have a bit of a battle between more negatives among financials and the potential positive (depending on who you ask) of declining commodities prices.  Oil is taking another hit this morning, while foreign markets are showing mostly modest declines.  The only economic reports of note are Retail Sales and the CPI next Wednesday and Thursday, and earnings season has mostly wound down, so the news flow should be dominated by continued developments in the finance and credit markets.

Despite yesterday's setback, moods seem relatively high as we enter the weekend and the Olympic Games, to which I too am looking enormously forward.  During the last Games, I showed some analysis about how stocks in the U.S. tend to do during the event (see the comment from February 9, 2006), and actually there was a better-than-average bias during the past couple of decades.  It would be tough to argue that the Games were actually an influence, but whether by chance or design, the S&P did quite well during the last Games, returning nearly +2%.

A headline scrolled by on Bloomberg this morning that showed how well Nike has done during past games, and that's something I touched on back in 2006.  I noted that NKE had sailed higher during 8 of the last 10 Games, including during every one since 1992 (averaging a +6.8% sprint).  The last Games didn't disappoint, as the stock triple-jumped nearly 4% while the Games were being played.  It's already hurdled 7% since the July low, so I'm not sure we'll see the torch passed again, but it'll be an interesting stock to watch for the next couple of weeks.  OK, enough with the bad puns.

Check out that comment from 2006 for a table of what had historically been the best- and worst-performers during the Games.

Looking at the table of our Indicators at Extremes on the Daily Overview page, a new entrant is the Nasdaq/NYSE Volume Ratio.  I last wrote about this type of extreme on May 6th, which turned out to be another instance of the indicator giving a heads-up of imminent trouble.

However, we've been having some issues lately with volume as more and more of it has been taking place off the major exchanges.  In May, we were seeing a spike in "speculative" Nasdaq volume in relation to "staid" NYSE volume whether we looked at exchange or off-exchange volume.  That's not the case this time around - while the exchange-only volume indicator is currently showing too much speculation, when we use composite volume there is no extreme at all.  I would still consider this indicator to be in the bearish column, but it's not a major negative for me at the moment.

On a more positive note, we are starting to see corporate insider buying pick up in earnest, with the latest InsiderScore^TM Buy/Sell Ratio at its most-stretched position since March.  In the spring, it did go on to a significantly greater extreme, but the current level is about on a par with what we saw last August and November.  The buying has been particularly heated in S&P 500 stocks, with InsiderScore's proprietary ratio for that index at its second-highest level in four years, just under what we saw in March.

On Tuesday and Wednesday, we went over some data that suggested that the short-term upside probably wasn't going to be sustained.  In addition, our shortest-term guides for the Nasdaq 100 in particular had reached "excessive optimism" extremes by Wednesday afternoon, a condition that has consistently led to struggles for stocks since last fall.

That proved to be the case yet again, though the NDX actually held up better than most of the other indices while those overbought conditions got worked out, and it was able to stop precisely at that 1880 level we've had our eye on - much of a move below that level, and the idea of a false breakout will start to register, which typically means we're due for a trip to the other end of the range (about 1800).

With our most sensitive guides mostly neutral at this point, I would consider the short-term negatives we went over earlier this week to be alleviated, leaving the short-term bias up for grabs.  I still have a modestly positive intermediate-term (one- to three-month) outlook based on the data we've discussed since July 15th, and that will stay in force until we find something that contradicts it, or the market doesn't respond as it should (a move below 1250ish in the S&P will be the first shot over the bow).