Thanks as always Dale for the weekly wraps. I've had your portfolio set up in my database for years and make the changes as you post them.
Wednesday of this past week was a refreshing reminder of what a good stock market looks like. Of course in this case, it was merely one of the many short covering fear based power up days we see during relentless downtrends, and not a reversal of fortune for the stock market. The greater weight of the evidence suggests the stock market is headed lower based on the multitude of indications and our analysis. Below are some of the strictly objective considerations and we are largely out of the stock market based on them. A safety first attitude under current market conditions appears the most wise and prudent course as risk outweighs reward.
Our breakdown scan was 2.4 to 1 over breakout scan on Friday. It was negative 4 of the past 5 days. In addition, it has been overwhelmingly negative 35 of the past 50 trading days. Of the 490 stocks that were on the breakout scan last week, 393 held on for a weekly gain of which most were bounces off interim bottom areas. In contrast, 674 stocks appeared on breakdown scan last week, with 582 of them posting weekly losses. This type of action by the scans over a period of 6 weeks has in the past been a precursor to significant meltdowns in the stock market.
Our oversold indicator has a history of hitting 150 to 200 at significant market lows. It is now at 30. An overall assessment of the market, in consideration of the 4 year Presidential cycle, seasonality, and price/volume activity indicates that this type of decline will see a significant low ahead and oversold conditions will match former levels at bottoms before a turn of consequence.
Volume picked up on Friday as the market sailed south again. That in itself is very poor action with the "Hope Crowd" trying to explain it away as a symptom of July Options expiration. I believe that the dominant positions in open July contracts were unwound earlier in the week on Wednesday and have found the "Hope" argument futile in the stock market. Mostly hope is the enemy when it flies in the face of reality.
For the week, losers were ahead of gainers roughly 3 to 1 in the broadest spectrum. The advance/decline volume differential was negative by over 3 billion shares on Friday. This is not Joe Blo doing the selling, its bigger interests. Maybe Mid East, maybe foreigners. The advance/decline volume was negative 3 of 5 days and the two days it was positive were a result of the 2 hour rally that began and Tuesday afternoon followed by Wednesday's short covering and options unwind. In the highest volume increase segment of the market, declines were better than 2 to 1 on Friday. Terrible pictures were painted by the high volume segment. For example stocks in the Russell 2000 were led by 1630 decliners and 325 advancers, with those stocks that had twice the average volume of the past 90 days seeing 3 to 1 downside in this index.
All indexes like the S and P 600, 500, Russell 3000, 2000, Nasdaq, Nas 100, etc are lower on the year 2006, and the Dow sports a 1.41% year to date gain at the moment. Some of the best technical analysts I know like Richard Stuttmeyer feel 10,000 is likely before the decline that began in May runs its course. Lowry's believes that the Wednesday bounce was a good opportunity to sell into strength and thinks we are in the early stages of a bear market unfolding. The fact that July 19th 92% upside days came from levels below the prior 90% upside day suggests they are nothing more than blips in a primary downtrend.
Looking at the charts of the indexes above from an intuitive perspective leads us to the belief that they will get deeper into red territory before a year end rally bails them to possible meager returns on the the year. Obviously that perspective doesn't preclude another rally attempt that could begin in August and fail as usual after a brief positive period. S and P futures were down 10 last night hours after the close and this doesn't bode positive for early going next week. VIX is also far from an extreme at less than 7% above its 10 day moving average. When the mid June rally attempt occurred, VIX was 27% above its 10 day moving average on June 13.
finance.yahoo.com
finance.yahoo.com
New 52 week lows on Nasdaq and the NYSE were 442, vs. new 52 week highs of 74 on Friday. It usually has gotten worse than this with daily new lows around 800 on the NYSE alone in the past at significant lows.
The total number of stocks within 15% of their all time highs contracted by 8% on Friday and by 4.7% on the week. The weekly obviously included a powerful Wednesday bounce that served to abate oversold conditions.
The action of energy stocks last week in the face of oil prices near 75 reminds me a little of the frenzy that traders were in back when Katrina hit and NG prices were at $15. Those entering NG at that time in an attempt to profit from macro disaster where washed out. It's still difficult to become bearish on energy, but today oil prices are set in the trading pits, and traders are a fickle bunch as portfolio managers with large sums of capital play copycat and follow the leader. OIH is a nightmare, breaking down below its June lows an very heavy trade last week. The June rally in OIH came on increasingly shrinking volume, a very poor sign. So from a technical perspective its pretty ugly with no signs of a bottom other than the hope crowd's wish for a technical bounce.
finance.yahoo.com
There are arguments for the bull case as well out there. Wholesale dumping of stocks based on fear etc. Some calling it the best buying opportunity in a long time. Other's think Condi's visit to the Middle East and a truce will be a catalyst for the market to advance. If Condi can end hostilities that go back a hundred years and more in that region, I'll print this page and eat it. The CBOE total Equity put/call ratio closed at 1.31 and as a contrary indicator, it would indicate this is now overdone. However in an unusual twist, we have seen more extremes concentrated into 2 months in the put/call ratio than ever before without a good reversal. So precedent is not working and at best, put/call ratios are secondary indicators in nature. The nature of portfolio insurance has changed over the years as well. While bull arguments are all valid considerations that could lead to something of a rally next month, the weight of negatives remain dominant and bears in firm control.
Here's a few shots of kittens with two faces to lighten up the mood.
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