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In
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The war between
the bulls and the bears is still being waged, though the picture is still
not perfectly clear as to which side will be victorious. We've got two
related points to that end to make today... messages you should absorb
no matter what the near-term outcome of the battle is. One involves
the market's undertow - which is not yet bearish - and the other
involves some emerging sector trends that may well be worth acting on.
Before diving
into that though, there are two blog entries we want to recommend...
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From
'Volatile' to 'Trend' in Three Weeks Flat - While the 'trend'
aspect is still in question (as we discuss below), here's the initial evidence
that stocks are indeed pointed lower. [Now, how good is the counter-evidence?]
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Confidence
Up To New Multi-Year Highs - ** UPDATE **. Well, confidence
is up to multi-year s high on some fronts, but is falling on others.
As we pointed out on Thursday, the Conference Board's Consumer Confidence
reading moved to a multi-month high of 57.9 for April, and is in a full-blown
uptrend. On Friday though, the Michigan Sentiment Index fell - again
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to 72.2. That was better than expected, but still below last month's 73.6,
which was even with February's 73.6, which was under January's 74.4.
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The
Undertow is Not Yet Bearish |
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In
Friday's blog entry we didn't make any bones about the bearishness that
had materialized over the last three weeks - if we had to bet, we'd
bet stocks were going to move lower now that its vulnerabilities were being
exposed. Of course, we don't have to bet; we can choose to remain
on the sidelines and let someone else fight the battle (and risk their
capital) while the true trend solidifies.
 And,
given the counter-arguments to the bearish view, that may well be the best
place to be for the time being.
So what's
bullish? While the overt
tides of the VIX and the 20-day moving average line are on the bearish
side of the fence, the undertow indicated by breadth and depth, technically,
are still bullish.
We're not going
to go back into the entire discussion about how and why we look at the
market's volume (depth) trends and advance/decline (breadth) trends as
a market barometer. We served up the full explanation back on March
25th (which you'll want to review if you're not familiar with the
premise). Suffice it to say that for the NASDAQ as well as the
NYSE, there are still more rising stocks than falling stocks, and still
more 'up' volume than 'down' volume. That scale's come close to
tipping in favor of the bears a couple of times, but has yet to actually
signal a truly bearish undertow.
The nearby graph
tells the tale. Advancers (green) have been trending higher than decliners
(red), and advancing volume (green) has been trending higher than declining
volume (red). While we don't absolutely have to have bearish crossovers
of these lines to see stocks tumble, the vast, vast majority of
pullbacks are accompanied at least by a bearish tip of the depth
scale, and usually the breadth scale as well. Here's
a full-screen shot.
In general,
volume and the advancer/decliner trends offer up early warnings of pullbacks
and rebounds. The warning period has probably already passed in this
instance though, if we are indeed at the beginning of a pullback.
As such, we need to be ready to respond quickly when/if we do actually
see this tide turn.
To help on the
timing front, we'll post updates of this chart as frequently as we can
in the blog, as well as send out a newsletter when the breadth and
depth trend finally do turn decidedly bearish.
In Wednesday's
newsletter we posed the idea of using the flow of money out of
aggressive and risky stocks and into safer ones as a subtle 'tell'
that investors were starting to view things bearishly (short term) in the
back of their minds. For instance, hospital stocks and healthcare supplies
stocks - relatively recession-proof businesses - were the only stocks
that made gains on Tuesday, while everything else was getting crushed.
Not that one
day is evidence of a trend, but three or four layers of similar evidence
certainly bolsters the argument.
 With
that in mind, consider this another layer of evidence - utility
and gold stocks were the only ones to make gains last week. Telecom,
which had been a habitual laggard, came close to breaking even. Healthcare
was third-best on the sector front, even with its small loss.
At the bottom
of
the barrel you'll find financials and basic materials... two arenas that
had been unstoppable for several months, serving as inspiration
for a continuation of the rally.
The relative
sector performance lately - especially that of the utility sector
- is clear on the nearby chart. If you want a long-term and bigger view
of the same, click
here. That bigger chart really shows what a stark reversal of
fortune we've seen in the last couple of weeks.
You don't really
have to read between the lines on the matter... defensive names are
benefiting from the demise of aggressive stocks.
While a week's
worth of sector data still doesn't confirm the inevitability of a pullback,
it's yet-another hint of what's going on in investors' minds. And,
if they think about it long enough, eventually they'll start to
behave accordingly, and create a self-fulfilling prophecy.
As is the case
with the breadth and depth data, we'll update this chart in the blog when
merited, and send an e-mail update when the changes are really significant.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
