Friday, January 18, 2008

Dear Market, Please can I have a bottom for (by) Christmas?

No mistaking who was in control yesterday. Now that the markets have August lows out of the way will bears run out of steam?

Two internals showing deep oversold territory are the Percentage of Stocks above their 50 and 200-day MAs. For the S&P, the Percentage of Stocks above their 50-day MA sits only 3 points away from its August low of 7.6%. During the cyclical bull market this indicator rarely dropped below 20% - so there is a fundamental shift in this indicator's dynamic.

The Nasdaq carries higher relative strength versus the S&P with the Percentage of Stocks above their 50-day MA in the 20s. The 19.75% of stocks above their 50-day MA compares favorably with the August low of 20.93%, but still a shade above the false bottom at 18.84%. However, this metric has lingered around 20% for the past few days as the parent index toppled - an indication that the selling is done. Unlike the comparable S&P measure, the Percentage of Nasdaq Stocks above the 50-day MA has seen a couple of touches at 15% during the cyclical bull market, so we're looking at a typical bottom for this indicator (and likely Nasdaq too; will this present itself as a shift towards technology stocks and away from large caps?).

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