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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | ABOUT | CHARTS | AFTERTHECLOSE | MON - Sector Strength | TUE - Interest Rates | Wed - Market Sentiment | THU - Commodities & Currencies | FRI - Market Breadth | SAT - Bullish Percents |

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Red is a column of O's in a downtrend, blue is a column of X's in an uptrend.  Below 30% is oversold, and above 70% is overbought.  Yellow is a shift down, green is up. | INDEX |

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There was very little movement in the Bullish Percents this week, and that isn't surprising for a low-volume, holiday period. 

The Transports shifted lower again and is clearly an area to avoid.  The chart below shows the price strength for the Transports has been huge for this bull market that began early-2003.  So the question is whether the current weakness is a well-deserved correction within a strong long-term up-trend, or is it a divergence with the rest of the market providing an early signal of trouble ahead.

The Financials shifted higher and is the area currently supporting the market because of its large weighting in the indexes.  It makes sense that as money is moving away from some of the weaker areas that it is moving towards this last area of strength.  However, at its current level there is very little room to advance further, and once the momentum begins to stall it is hard to see what other areas can begin to lead.

Bottom Line: The Bullish Percents are well into the overbought zone where momentum stalls and the market churns in a topping process leading to an intermediate cycle correction.

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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The market continues to hold up well despite some early signs of topping action.   I see lots of blogs discussing the early signs of weakness in the Transports and NDX, but little has been mentioned about the failure of the Mid Caps to break to new highs.

At the moment, the Mid Caps appear to have failed at resistance and have not broken to new highs, joining the Transports by signaling a non-confirmation of the stronger indexes.

In addition, the RSI indicator has failed at important resistance.  On a weekly chart, the 65-level is generally the upper resistance level in a bear range, and the MID RSI has now failed to push above this level and appears to be headed lower.

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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Last Friday we reviewed the McClellan Summation indexes for the NASDAQ and NYSE, and they have now both confirmed a cross-under signal.  The Summation gives early signals that anticipate changes in trend. 

Today's chart above shows the Bullish Percents for the NASDAQ and NYSE, and they have now both risen to a level of prior peaks.  Rather than anticipating a change of trend, the Bullish Percents are coincident indicators used to confirm a trend.

The fact that they are now at prior peaks, and the moving averages have leveled off, indicates that upward momentum has slowed and the market indexes are now in a topping process.  This is a sign that investors need to become defensive and position for the possibility of a correction.  A change of trend will be confirmed when the Bullish Percents turn down along with market prices.

Below is the same chart but with a shorter time-frame of nine months.  You can see that the Bullish Percents are now below their moving averages.

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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Natural Gas prices have pulled back and are now below the 39-week moving average, joining the other major energy commodities, oil and gasoline, in a significant correction of a major uptrend.  Below is a monthly chart of natural gas prices with the SAR and RSI indicators, both of which work well with long-term charts of major trends.

Natural Gas prices have shown a history of major spikes higher with sharp corrections that last for months, and prices are now in the middle of a range and headed for support below that could be a significant opportunity.  The SAR has shown excellent long-term signals, and the RSI indicates that prices have been in a bull range that consistently finds support at the 40-level. 

There have been no major moves in currencies after the widely reported drop in the US Dollar late in November.  Gold and silver made no major corresponding moves perhaps because they are still correcting after the gigantic move that completed last spring.

The monthly chart of gold below (log scale) shows that it may continue to consolidate for a number of months before the next major uptrend, and the SAR and RSI range may help signal the next opportunity. 

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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The Short Interest Ratio represents the number of days it would take to cover short positions. It is calculated as the Short Interest for the Current Month divided by the Average Daily Volume if trading continued at the average daily volume for the month.  A low number represents extreme optimism which is bearish for stocks, and a high number represents extreme pessimism which is bullish for stocks. 

In the spring, there was an extremely low level of short interest (optimism) that coincided with the market sell off in May.  In fact, it was the lowest level of short interest since the bull market began in the fall of 2002, so isn't surprising that it was also one of the most severe market corrections.  In the summer, there was an extremely high level of short interest (pessimism) that coincided with the start of the current market rally.  It was actually the highest level of short interest since early 1998, so it is consistent that the current rally has had so much strength.

In October, the ratio fell slightly reflecting a decrease in pessimism, but the current level in December still shows a good deal of skepticism by investors which is surprising considering how strong and broad based the stock market rally has been.  The high level of short interest will provide support under any price corrections until the ratio works its way lower.  

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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(Second chart from Tim Wood, Financial Sense Online)

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The surveys show that since the lows in mid-June, advisors and investors have become more and more bullish along with the rising stock market.  The following is a summary of the survey status over the past week

• The Investor's Intelligence survey is at a level of extreme bullishness which is an unfavorable sign for the market. This is the sixth week at this extreme level.
• The American Association of Individual Investors survey has surprisingly remained at the low end of the neutral range for a number of weeks, favorable for the market.  
• The Market Vane survey is at a level of extreme optimism which is unfavorable for the market (this poll has a different range than the prior two). 
• The Birinyi blogger poll is new so there is not much history to judge bearish and bullish levels, but it is at a level of extreme skepticism which is a favorable indicator for the equity markets.

Bottom Line: The II and MV surveys clearly reflect a strong market that has rallied for over 6 months and is now at a level of high-risk for a correction.  The consistent lack of bullishness in the AAII and Birinyi surveys is perplexing considering the bullishness in the II and MV surveys.  The inconsistent results of the surveys indicate that despite the huge run-up of prices, there is still a degree of skepticism in some segments of the public which is favorable for the market.

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Sentiment analysis is an important component when following the markets, and is considered a “contrary” indicator.  Contrary because if too many people are bearish then there aren't enough sellers left, the balance tips to buyers, and the market starts to advance.  If too many people are bullish, most funds are already invested, the balance tips to sellers and the market weakens.  One way to determine if investors are bearish or bullish is by taking surveys and tracking at what levels these polls indicate investors are at the extremes of bearish or bullish sentiment.

 

The figure above shows four polls and their current sentiment levels.  Keep in mind, sentiment analysis is not a science and only provides very general information.  Sentiment is not a signal to take action, but is a warning about the current state of the markets.  There have been many occasions when bullishness reached high levels well before the market started to weaken.

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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Long-term bonds surged higher just after the May sell off of equities, pushing down long-term interest rates in anticipation of economic slowing and lower rates of inflation.  The lower rates helped equities find support and resume their uptrend.  Now the 30-Year (above) and the 10-Year (below) are pulling back from the highs and rest at an important support level, with bullish uptrend support just below.  If bonds find support at this level, it will may add support to equity prices again.

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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A lot has been written lately about the potential for large-caps to finally start out-performing the small and mid-caps.  The rotation to large-caps appears to have started with the May-2006 sell-off of the market, and has picked up strength in December.  Both the daily and weekly charts confirm the trend.

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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The SAR indicator on the weekly NASDAQ chart above has signaled a change of trend for the first time since August.  This indicator is valuable during periods when the market is experiencing a strong trend.  Also notice the weekly candlestick bearish engulfing pattern adding confirmation to the SAR indicator signal.  A significant support level is the pivot high from April.

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All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. | ABOUT | CHARTS | AFTER THE CLOSE 

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Red is a column of O's in a downtrend, blue is a column of X's in an uptrend.  Below 30% is oversold, and above 70% is overbought.  Yellow is a shift down, green is up. | INDEX |

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The market has shown weakness over the last five days, and the Bullish Percents are starting to confirm the weakness with some shifts to downtrends and movement to lower levels.

The most important change from last week is the NDX which registered a 3-box reversal to a column of O's and a shift to the 60-level.  This movement corresponds with the Friday close of the NDX index below 50-day moving average. 

The Transports continued to show weakness from within the overbought level as it shifted to a 'bear confirmed' last week, and now this week shifted to the 60-level.  Dow Theorists can't be happy with the Transports after three closes below the 200-day moving average and a solid non-confirmation of the new highs for the Industrials.  For followers of Dow Theory, this signal is more than just a change in the intermediate trend that began last summer.  A non-confirmation has implications regarding the health of the bull market that began with a Dow Theory confirmation signaled in 2003.

The Energy Sector and Industrial Metals Industry also signaled weakness this week.  The Energy Sector shifted to a downtrend with a move lower to the 70-level.  This is still a healthy level with over 70% of energy stocks with P&F bull signal, so a future shift below the 70-level will provide better information about the health of this sector.

Industrial Metals are known to be a barometer of economic strength, so this is an important area to monitor.  The Metal industry shifted to a downtrend and dropped to the 50-level, and this may be an early signal confirming economic weakness.

In general, the Bullish Percents have held up very well in December and have solidly confirmed the impressive broad advances of the market that has included almost all sectors and industries of the equities market.  However, the Bullish Percents are now showing just enough weakness to confirm that the market is in a topping process.  Another push higher for the market is certainly possible for the indexes, particularly due to the favorable seasonal period, but the risk is of a general correction to the intermediate trend is now high.

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