Thoughts on the Current State of the Market
This was from my ADVFN.com contribution:
I had commented pre-market how indicators such as the NASDAQ Summation index, and NASDAQ stocks over their 50-day MA, had flipped negative even though the parent index changed little on the day. I had also said in my Wednesday commentary:
There are two things you can take from an indicator which stated 89% of the S&P composite stocks were bullish: [1] It takes a long time to turn a ship - an actual top in the S&P does not immediately follow a top in this indicator (as was the case earlier this year); stocks don't collapse through their 50-day MAs all at the same time, its a gradual decay as fewer and fewer stocks carry the index on their shoulders. Net effect is therefore short term bullish [2] So many strong performing stocks means there is little new money to support inflated prices. Yes, people take their profits but will these same people want to re-invest into another overly inflated stock? This is long term bearish.
Given the state of the indicators it looks like the Santa rally has run its course. Yes - there maybe another up leg left in the market (indeed the net bullish strength as measured by market indicators suggests this is more likely to happen than not), but for those who think 2006 will be a great year are likely to be disappointed. In defense of the bulls, market indicators are just what they are. Many traders use the NASDAQ Summation index to enter and exit; but, a little known fact from the pre-2000 top was this indicator did not give the same signals it does now. If you look at the peaks and troughs of post-2000 you will see these match (more or less) the peaks and troughs of the NASDAQ. But pre-2000, a trough in this indicator was often accompanied by higher high in the NASDAQ than the prior indicator peak (if that makes sense!); not too bad if you are a bull (you made money no what you did) - but if you were trying to sell, or short the market at and indicator peak you either took profits too early, or were killed on a false signal.
It is also interesting, if it was too hold true, that in a strong bull market peaks and troughs in the NASDAQ Summation indicator would be accompanied by higher highs in the parent index, and consequently, the reverse would be true in a strong bear market. In a neutral market (such as now?), peaks and troughs in the indicator would match peaks and troughs in the parent index. How long will it last? Who knows. People talk of markets been either bullish or bearish, but a neutral stance is also an option. Who wants to bet we will have 15 more years of what we have had over the last 5 (range bound between 1,100 and 5,100???). Its speculation - chiefly because the NASDAQ Summation index has only been around since 1998. But its something worth taking note of.
I had commented pre-market how indicators such as the NASDAQ Summation index, and NASDAQ stocks over their 50-day MA, had flipped negative even though the parent index changed little on the day. I had also said in my Wednesday commentary:
One indicator I have not mentioned too much about is the $SPXA50 (number of S&P stocks over their 50-day MA)...... It currently sits at 445 which has exceeded its prior high of 421 from July. When the indicator hit its July high the S&P topped just over a month later."
There are two things you can take from an indicator which stated 89% of the S&P composite stocks were bullish: [1] It takes a long time to turn a ship - an actual top in the S&P does not immediately follow a top in this indicator (as was the case earlier this year); stocks don't collapse through their 50-day MAs all at the same time, its a gradual decay as fewer and fewer stocks carry the index on their shoulders. Net effect is therefore short term bullish [2] So many strong performing stocks means there is little new money to support inflated prices. Yes, people take their profits but will these same people want to re-invest into another overly inflated stock? This is long term bearish.
Given the state of the indicators it looks like the Santa rally has run its course. Yes - there maybe another up leg left in the market (indeed the net bullish strength as measured by market indicators suggests this is more likely to happen than not), but for those who think 2006 will be a great year are likely to be disappointed. In defense of the bulls, market indicators are just what they are. Many traders use the NASDAQ Summation index to enter and exit; but, a little known fact from the pre-2000 top was this indicator did not give the same signals it does now. If you look at the peaks and troughs of post-2000 you will see these match (more or less) the peaks and troughs of the NASDAQ. But pre-2000, a trough in this indicator was often accompanied by higher high in the NASDAQ than the prior indicator peak (if that makes sense!); not too bad if you are a bull (you made money no what you did) - but if you were trying to sell, or short the market at and indicator peak you either took profits too early, or were killed on a false signal.
It is also interesting, if it was too hold true, that in a strong bull market peaks and troughs in the NASDAQ Summation indicator would be accompanied by higher highs in the parent index, and consequently, the reverse would be true in a strong bear market. In a neutral market (such as now?), peaks and troughs in the indicator would match peaks and troughs in the parent index. How long will it last? Who knows. People talk of markets been either bullish or bearish, but a neutral stance is also an option. Who wants to bet we will have 15 more years of what we have had over the last 5 (range bound between 1,100 and 5,100???). Its speculation - chiefly because the NASDAQ Summation index has only been around since 1998. But its something worth taking note of.
