Today's Market Observation 05.21.2009 Mon  Tue   Wed  Thu   Fri  Goldberg Archive

Intermediate Term

Nothing is Settled

BY MARTIN GOLDBERG, CMT | May 21, 2009

The rally off of the March '08 lows, not only has been historic in its magnitude relative to its duration, but it is also historic in terms of the legions of believers in a new bull market that the rally seems to have created. According to Investors Intelligence, bulls now outnumber bears by 41% to 34%. As of Wednesday evening, the VIX volatility index is below 30. Instead of becoming irrationally exuberant and lose themselves once again in the long term dogma, bulls would be wiser to peel a sharp and jaundiced eye on the market itself. In spite of all of the new good will, the market, at least in terms of the US major market indices, is showing near term signs of weakening although nothing has been confirmed in the intermediate term.

Conversely, Bears would also be well served to consider that the previous bull market - until it moved into a downtrend and then crashed - it produced several years where there was an absence of even a correction of 10%. With the thought of that apparently "safe" market fresh in everyone's mind, and with capital depleted over the last few years, the desire and/or need to rally-chase is quite logical and it has been successful for nine consecutive weeks.

The weekly chart says it clearly - nine weeks down followed by nine weeks up. And the S&P 500 sits pretty much where it did 18 weeks ago. Profits were made on both sides of the trade. But nothing has been settled in the intermediate term.

At this moment, the market looks to be taking at least a pause. Following is the daily chart of the S&P 500. The current level of about 903.5 (as of Wednesday evening), was the result of a failed attempt of the index to make a higher high at about 930. The S&P closed down slightly but this occurred with a daily close near its lows and the volume was decisively higher than the big rally from two days ago. Yet the S&P is clearly in an uptrend; so it would be folly to think that there is something in the market action to suggest that the uptrend is still not current and active. While a lower high may have been made, the S&P has not made a lower low. Therefore the intermediate term uptrend is intact.

If the short term picture gets bearish, one likely warning signal will probably be the action in the Dow Transports. Here you can see that for the last two days, the index closed near its daily lows at about 3130. It is bearish that the big rally from Monday occurred on light volume, whereas the Transports failed to go anywhere while volume increased over the next two days. If the transports start to give up ground to the bears, it will cross below its 20-day exponential moving average thereby negating the "save" of this territory earlier in the week.

Of perhaps more importance is the bearish picture being flashed by the financials' short term action. Here you see the Financial Select Sector ETF (symbol XLF) making a lower high on Monday. Also bearishly notable is that on its way to making the high of 2 Friday's ago from the rally off of the early March bottom, the financial ETF had 26 up days and only 17 down days. Yet since that top, there were 7 down days and only 2 up days. If the stock market needs healthy financial stocks, this action would not seem to be a positive sign for the US stock market.

There's similar bad action in the Retail Holders ETF where since apparently topping the "score" has been 9 down days and 2 up days. Volume trends here are also bearish as Monday's big rally came on anemic volume, at least in terms of the ETF.

By the same token, if the overall market picture is to be considered bullish we shall probably see it in the action of the market leading stocks such as emerging market stocks. Below we see the daily picture of the emerging market ETF (smbol EEM). Over the last 3 days the daily action has gotten progressively less bullish. Yet unlike the US indices, the emerging markets made a higher high versus the lower highs made (so far) by the US indices. A couple of days of higher highs confirms the market uptrend.

Today's Market

Although the market was down fairly decisively today, still nothing has been settled. Here is the weekly chart of the S&P 500 updated. As can be clearly seen below, while the index has struggled over the last 2 weeks, there is every reason to believe that the market is just pausing. If 880 is taken out, that would be a weekly lower low and that would be technically significant -especially if this were to occur on high volume.

There was also something positive to consider. That is the financials had an up day in an otherwise lousy market. Another positive - the market showed strength toward the close.

The bond market was weak, the stock market was weak and gold was strong (although gold stocks lagged the metal).

Have a great evening.

Martin Goldberg

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Martin F. Goldberg, CMT
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