Has stock market rally run its course?

“From a technical perspective, a primary bear market still exists as long as the major indices remain below the January highs and the 200-day moving averages. Many of the rally’s leaders (indices and sectors) seem to be running into major resistance at these levels and look susceptible to retrace at least a portion of the gains since the March low. Further evidence of a short-term top in the making comes from a chart showing the percentage of S&P 500 stocks [90%] trading above their 50-day moving averages.”

Not surprisingly, investors’ lingering worries about the financial sector resurfaced yesterday, pulling the S&P 500 Index down by 4.3% and the Dow Jones Industrial Average by 3.6% – the worst losses since early March and in all likelihood a Lowry’s 90% down-day.

While the short-term movements play themselves out, it is important to remember that the longer-term charts have not yet signalled a secular uptrend. Using monthly data, the graph below shows the multi-year trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the level of the indicator is grossly oversold, as confirmed by the RSI indicator (blue line).

The stock market will tell its own story over the next few days, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels – 677 for the S&P 500 and 6,547 for the Dow Jones – be breached, it’s “Katie, bar the door” (quoting from Richard Russell).

S&P 500 Financial Sector Overbought

The S&P 500 Financial sector is now 28.5% above its 50-day moving average.  Below we highlight the historical 50-day moving average % spread for the sector going back to 1990 (as far back as daily sector pricing goes).  As shown, just as the sector hit extremes on the oversold side in recent months, we’ve now hit extremes never seen before on the overbought side. 

Source: Bespoken Research

S&P 500 Sector Breadth Measures

The S&P 500 is currently trading 3.73% above its 50-day moving average, while the average stock in the index is 5.34% above its 50-day.  This is a positive breadth measure.  Below we provide the same analysis for the ten S&P 500 sectors.  As shown, the Energy sector has the most positive breadth with a difference of +4.58 between the average stock’s distance from its 50-day versus the sector’s distance from its 50-day.  Consumer Discretionary ranks 2nd, followed by Technology and Telecom.  On the negative side, the Financial sector as a whole is trading 10.12% above its 50-day, while the average stock in the sector is 5.06% abvoe its 50-day.  Only two sectors remain below their 50-days after this significant market rally and they are both defensive in nature — Health Care and Utilities.

Source: Bespoken Research

Percentage of US Stocks Above 50-Day Moving Averages

Below we highlight the percentage of stocks trading above their 50-day moving averages for the S&P 500 and its ten sectors.  This is a good breadth indicator to measure the underlying strength or weakness of rallies or declines.  As shown, 62% of the stocks in the S&P 500 are currently trading above their 50-days, which is getting close to the 75%-80% level that we’ve seen at prior market peaks during this bear market.

In the Financial sector, 69% are trading above their 50-day moving averages, which is the highest level in about a year.  This speaks to the strength of Financials during this rally.  On the other hand, Industrials, Health Care, and Utilities all have less than 50% of stocks trading above their 50-days, which means breadth has lagged during the rally for these sectors.  Breadth has been strongest for Technology, Materials, Energy and Telecom.  More than 70% of stocks in each of these sectors are currently trading above their 50-days.

Source: Bespoke Research

Financial Sector

Lately it seems as if the financial sector is the market. For this reason, I now watch the financial sector SPDR (XLF) and the KBW Bank Index (BKX) tick by tick, in addition to a handful of financial stocks that seem to be in the most peril on a particular day.

In my opinion, however, XLF is the best way to capture the full extent of goings on in the financial sector, from banks and brokerage houses to insurers and consumer finance companies, XLF pretty much covers the waterfront.

The chart below captures the last six months of action in XLF and highlights the problem facing XLF and the broader markets at the moment. Stocks are overbought in the short-term and oversold in the long-term.

Rather than use oscillators to show how overbought and oversold stocks are, I generally prefer to rely on a combination of moving averages and trend strength indicators, with volatility as an important secondary indicator. Looking at the moving averages, XLF is now well above the 10 day MA and running up against resistance in the form of the 50 day MA. In terms of trend, utilizing the Aroon indicator to measure trend and breakout strength, XLF is bullish in the 10 day calculations, but bearish from a 30 day perspective. In this chart there is not much to see in terms of volatility, but by tracking in the upper half of the Bollinger Bands, XLF generally has positive short-term momentum, while proximity to the upper band suggests a reversal is likely soon.

So there you have it: bullish momentum triggering buying on the part of the trend following crowd, while overbought indicators have the swing trading crowd ready to get short. Such is the current state of the market. The direction in which you lean is more likely to be a function of the time horizon of your analysis than any other technical factor.

Does Yesterday’s 90-90 Lowry Up Day Change Anything?

Yesterday’s +3% snap-back rally was one of the famed Lowry 90%-90% days. For those unfamiliar with the term, these are climactic days coined by a research report by Paul Desmond written in 2002 (you can find the original report in the free trading resource section – in the Articles and Reports section).

90-90 days are defined by two conditions:

1. Volume is extreme so that 90% or more is either devoted to downside volume or upside volume.
2. Points are so extreme that they are 90% or more either gained or lost to the downside.

These days are significant because historically, every single major shift in the nature of the market has been presaged by the presence of one or several 90-90 down days (representing panic selling) followed by 90-90 up days (panic buying).

We’ve seen quite a few of both 90-90 up and down days during this vicious bear market. So much so that they have tended to be given less and less attention. Yesterday’s extreme up day was even more significant because it was on the heels of a 52 week low. We’ve seen these before too:

But before you get excited, consider that for all its glory, the rally was an inside day. That’s hard to believe since it was so powerful. But it still didn’t engulf the previous candlestick.

As well, the volume was nothing to write home about. It was higher than the previous session’s but compared to the November low, it came up short.

Most of the impetus for the rally came from a massive short covering rally in the financial sector. The Philadelphia Bank Index (BKX) was up almost 14%.

As well, Lowry Research continues to be unimpressed by the market’s behavior. In a recent reports, Paul Desmond says:

“A lot of investors were hoping the market would hold at the November 2008 low. As those hopes were broken, investors tend to panic. We’re really at a critical stage.”

Until the market eliminates those investors who bought high but are still reluctant to sell and take a loss, it will not achieve capitulation. A sign of approaching capitulation will be a slowdown in the rate of selling. That will set the stage for investors to begin looking at opportunities. We’re still into a healthy bear market.”

For all its significance and predictive qualities, the concept of 90-90 days is just one of the many tools that Lowry Research uses to analyse the market. Their most important indicators are proprietary and measure buying power & selling pressure. According to these indicators, Lowry Research is still advising clients to stay on the sidelines because investors aren’t done selling.

Check out my previous in depth report to find out more about Lowry Research and a sample of their analysis of the market (including charts of their proprietary Buying Power and Selling Pressure indicators).

Financials Wipeout

In the first chart below we highlight a ratio of the S&P 500 to the S&P 500 Bank group going back to 1940.  When the ratio is rising, the financials are getting weaker relative to the S&P 500 as a whole.  As shown, the ratio is currently as high as it has been over the entire time period, meaning the banks are as small as they’ve been relative to the overall index.  Where we go from here, nobody knows, but the financials are pretty much getting wiped off the investment map.

Below we highlight the percentage declines from peaks of various asset class busts in the last decade.  Prior to the declines that financials, oil, and homebuilders are seeing currently, the only recent comparison for the current generation of investors was the Nasdaq bust from 2000-2002.  As shown, the Nasdaq went down 78% from its March 2000 peak to its October 2002 low.  Following the bursting of the Internet bubble, many investors didn’t think they’d see a similar bust for decades.  But the current declines in financials and homebuilders have now eclipsed those of the Nasdaq, and oil has also gone down just as much. 

Oil’s decline of 77% from July 2008 to its low in December was the fastest bust of the group, while homebuilders have gone down the most and for the longest period of time.  Since July 2005, the homebuilders are down a whopping 87%!  And the S&P 500 Financial sector is down 81%, which isn’t as bad as the homebuilders, but given the fact that it didn’t go up nearly as much as the homebuilders, it’s probably worse.

Source: Bespoke Research

Long-term charts of the financial sector

“A look at long-term charts of the S&P 500 Financial sector is downright depressing. The first chart below dates back to 1990, and as shown, the sector closed at its lowest level since March 1995 yesterday. The sector is now down 79% from its highs in 2007. A chart of the sector all the way back to 1940 shows just how much the sector has fallen in such a short period of time.”

Source: Bespoke, January 21, 2009.

Tricom Today 20-1-09

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Disappointing day for our market down 128 underperforming the 14 point fall the SFE Futures suggested. The big drop comes on the back of the UKs financial sector collapse overnight. US Markets were closed in recognition of Martin Luther King holiday. Financials are struggling down 3.9% overall, big four banks the worst performers all down over 4.3%. Resources also underperforming led by BHP and RIO, both down over 5%.