Not-Great Breadth Is About
The Only Worry
07/23/08 9:20 AM EST
Good
Wednesday morning...We begin the day with another bump up in the
pre-market futures. The news and earnings flow has been mostly
positive, Oil is backing off and continuing the topping patterns we
discussed
last week, and foreign markets were very strong with 1% and 2% gains
almost across the board.
Over
the past week, we've gone over several studies that suggested
higher prices ahead in the intermediate-term. From a
spike in panic readings last Tuesday to
multiple 1% up days coming out of a 52-week low to
heavy volume on a big up day, what we've seen so far has
almost been a classic recovery.
I
say "almost" because the one thing we have not seen is a
day with ridiculously lopsided positive breadth and up/down
volume numbers. I've touched on this several times over
the past week, and it continues to nag me.
I
went back to 1965 and looked for any time the market was in a
similar situation to now. Basically, I wanted to find
times when the market was oversold (meaning it had a 10-day
Up Issues Ratio less than 45%), then put together a string
of 1% up days in the S&P 500 (meaning at least three days
with 1% gains within one week).
I
then separated those rallies into "good breadth" ones and "bad
breadth" ones. The good kids were the ones where we saw at
least one day with an Up Issues Ratio greater than 75% during
the prior week. The bad seeds were the ones where we did
not see any kind of big positive breadth day despite the
multiple 1% gains.
The
table below shows the dates and forward performance in the S&P
after the good breadth rallies.
click here for
larger table
The
results were fairly impressive. From the short-term
through the intermediate-term, the S&P was solidly positive.
There is nothing great among the numbers, it's actually less
skewed than most of the studies we looked at during the past
week, but we're also now coming out of a more oversold condition
than we were during most of the times in this table.
Now
let's look at the bad breadth rallies:
click here for
larger table
This
is what troubles me. In the short-term at least, the S&P
had difficulty holding on to the 1% gains when breadth never
showed a big positive surge. The last few times we've seen
this, all led to failed rallies during the last bear market.
Strangely enough, the three-month results were actually more
positive than the "good breadth" rallies in the first table,
probably owing to the fact that these "bad breadth" rallies
tended to fail in the short-term and lead to even-more-oversold
conditions.
Also
causing me a bit of a pause again in the short-term is our
Short-term Indicator Score, which almost made an all-time
extreme as of yesterday's close. At 19%, we're now seeing
the most-stretched reading since March 2000. That month
has bad connotations, but I'm not reading anything that sinister
into it. In fact, it could actually be a positive
longer-term sign that we're seeing this kind of buying interest
coming out of such oversold longer-term conditions, and haven't
backed off much from the prior round of short-term overbought
readings.
But
as far as new positions go, I find it extremely difficult to try
buying into these kinds of conditions, even given that I'm
positive on the intermediate-term. As the indices bump up
against possible resistance levels (1280 on the S&P 500, 12000
on the DJIA and 720 on the Russell 2000), and we see these kinds
of short-term readings, aggressive traders may be looking to
sell short against those resistance areas looking for at least a
temporary rest again.
I'm
not quite prepared to do that at this point, but that may change
before the day is out if we get closer to those levels on the
indices. Again, though, any negativity is based in the
short-term only as the one- to three-month time frame has looked
quite positive ever since last Tuesday.
Continue to all of
today's updates
