This seems to be a common theme for technicians during transitional periods of the market. This is not to take away from the obvious advanatages of TA and its followers such as myself. But I have found even very experienced people who are nationally recognized experts, like John Murphy, find it difficult to make a determination when the market is in transition. This is where their indicators can give mixed signals.
Perhaps price patters, critical areas of support and resistance, money flow, and even market sentiment can help fill in the picture during this period of time. I see you have been also incorporating Zweigs work, who also incorporates indicators outside of the traditional set of technical indicators that have more of a fundamental bent to them.
From what I can see, negative market sentiment has been growing over a period of time. Visible evidence of this started when money started to be moved to gold and oil stock at an earlier time. Next, we see the market respond to economic reports that can be interpreted as positive by the market with no follow through the next day, or even a selloff such as when the FOMC was found to have left interest rates alone. The market at this point was ripe for negative news that can feed into this developing sentiment. So when Greenspan revisited Asia again, the market did not respond well. I think what has masked this growing negative sentiment is the short term speculative crowd that is usually the last to figure out something has changed. Much of their efforts has been in the tech sector. Now we see tech sector selloff even when good earnings news is reported by companies like DELL. So even the speculator are nervous and turning a bit pessimistic right now. This selloff is particularly significant for this group since it is the speculator that has been playing DELL stock. The funds before this DELL selloff had moved into the second tier stocks like CPQ and even GTW earlier in this rotational period, not DELL. Meanwhile the public money moved into MSFT and INTC and DELL which were the first to get hit in comparison to the stocks the funds had moved their money into.
Next week will bring further evidence of what is in store for the market for the near future. If we are going to see a rally into a new bull run, IMO it will likely start next week after the holiday. If the market continues its selloff , then this is confirming evidence of negative market sentiment and we may eventually challenge April lows before moving higher. If the market challenged previous highs such as in the DJIA, then perhaps the negative sentiment is not as widespread and serious as it is beginning to look. The critical time comes when the market challenges significant resistance like the old high of the DJIA. If the market is not able to break through significant resistance, then this will give more credence to the thinking of the bears and a selloff can result. If the market does make it to new highs, this can encourage more speculators who have been anxious to see another bull run to commit their money. At this point I think it would be important for the funds to step up their purchases in anticipation of higher prices to help lauch such a rally into a longer lasting bull run. Even if a selloff on an unsuccessful challenge of old market highs results, I still think we will have a trading range market. The key to a new bull run is how the S&P 500 will respond to a breakout in the DJIA. Without validation of the DJIA breakout be the S&P 500 following suit, then I think the rally will be short lived. Also the professionals may take the other side of a challenge of new highs until they are convinced that the market is changing and adopting a more agressive stance. So the first challenges may not be successful.
The fund money has been in rotation and evidently keeping a small cash position. To me this indicates the funds do not think there will be a market correction in the near future. If they started to take much more defensive positions such as moving money to money markets and bonds, then this can precipitate another correction, but this does not seem to be the case. However, by moving their money into defensive stocks like consumer staples from consumer cyclics, and moving money into the blue chip DJIA stocks, IMO they are preparing to weather a downturn in the economy that will continue to show itself in slowing growth. This money has been moving to companies that so not have that high growth that they favored earlier. But these blue chip type of stocks are solid companies that have been reporting more *reliable* earnings. This together with the selling off of the hig techs, I think if we were to have another market bull run, it would be the DJIA and the S&P 500 indices that would be the best indicators of this advance to follow.
Just some thoughts of mine. Comments always welcome.
Bob Graham |
