|
Upon review of such examinations, we either leave the Doctor’s office with a clean bill of health and relieved, where our preliminary thoughts are confirmed, or in some unfortunate circumstances, our greatest fears become reality, where further diagnosis and prognosis are required. Much like one’s health, both investors and traders should treat their investments/positions with the same diligence and care. In order to do so, one must be willing to dig beneath the surface and perform the various batteries of tests and procedures. Why is such so important? Well, while everything may appear fine from a surface perspective, such as price, volume and action, things can and do change very quickly and dramatically when it comes to investments and the markets. Whether it be events such as, earnings announcements, economic reports, geopolitical, management changes, accounting irregularities, mergers, etc., the end result can often end in pain (losses) if one is negligent in their due diligence. On the other hand, despite our best efforts in taking a proactive approach, we’re often thrown a curve ball, which not only arrives unexpected, yet completely out of our control. At this point, one may be wondering why the analogy between one’s health and investments? Simply, we shouldn’t judge a book by its cover, a person’s character by their appearance, nor our investments solely from the surface. Having said that, we direct your attention below to the charts of the DJIA, S&P 500 and COMP, where despite last week’s late slippage, all three indexes appear to be in a favorable position for now, at least from a technical standpoint. Interestingly, when we dig a bit deeper into the internals and view the Bullish Percentage of each, something more may possibly be at work. Let’s take a look.
As we can see from the 3-Year Daily chart above, the DJIA is clearly in an upward trend and making multi-year recovery highs. Yet, when one views the Bullish Percentage chart of the Dow, which indicates the percentage of issues that make-up the index that are currently trading above their 200-day moving average, we notice a couple of important developments. First, any number above 70 is bullish, while conversely, a number below 50 designates weakness. Presently, the BP index resides in a neutral position at the 67 level. Secondly, despite the Dow printing multi-year highs, the BP index seems to have topped out in early ’04. Thus, while the DJ Industrials has moved on to new highs, it’s being pulled uphill into greener pastures by fewer horses, where it’s possible that we may be witnessing a negative divergence and lagging breadth. The S&P 500 finds itself in a similar position as the Dow. However, notice the pattern of lower tops in the BP index, where it also appears to have topped-out in early ’04.
Finally, glancing at the COMP below, it’s quite evident that this index and its BP index are clearly lagging both the Dow and S & P’s. Furthermore, with its BP index resting in the neighborhood of 56%, it’s dangerously close to turning outright negative should the 50 level be breached.
Therefore, while all appears calm on the surface, with the major indices recently printing multi-year recovery highs, the averages appear to be doing so on lagging breadth. And while such scenario may not be alarming to the masses, we nonetheless feel as though both investors and traders alike would be wise in monitoring future developments within the internals, which ultimately, may come back to bite this tape. Prudence and caution is warranted in this most selective and tricky environment!!
CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
