Today's Market Observation 11.19.2009 Mon Tue Wed Thu Fri Goldberg Archive
Internal Problems
BY MARTIN GOLDBERG, CMT | november 19, 2009
As the market averages stage yet another rally, market internals continue to degrade. It is quite possible that the advance of the major averages can continue into the favorable year end seasonality in a similar fashion as was the trend in last bull market. Another short and shallow correction lasting at most two to three weeks is also a real possibility for the major averages in the short term. This would continue a trend that has been fairly consistent since August. However, there appears to be a new phenomenon in the market that warrants watching since if it continues, it is probably indicating something more meaningful than the typical short shallow correction of less than 10%.
What are some of these internals? First, it is curious that the small cap stocks are severely underperforming the more capitalized market averages. Consider the short term chart of the Russell 2000 index. What you see in October is an attempt for the small cap average to best the $62/share level reached in August. It tried for 5 days before it gave up, whereupon it made a low on November 1st that was lower than the low it made on October 1st. Over the last ten trading days, as the Dow went to new highs, the Russell made a lower high. You can see that the volume bars (corresponding to the Russell 2000 ETF trading) for down days are greater than the up volume days. This suggests distribution of the smaller cap stocks.
Those October highs are vulnerable for numerous indices and should be carefully watched because a failure to hold the October highs is technically significant.
And speaking of distribution, it is curious that the proprietary accumulation/distribution index published by Investor’s Business Daily (IBD) has the Nasdaq, S&P 500, the Dow and NYSE at D-, D-, D and D, respectively. What is curious about this is that the averages are at their 52-week highs. Distribution can also be seen by examining the volume trends of the major indices which show the tendency toward low volume up days and high volume down days.
It is also curious that while the Nasdaq sits on its 52-week high, only about 40% of the stocks listed within it are above their 50-day moving average.
Of the US major averages, it is the most stable Dow Jones Industrial which is now leading the others. History suggests that strong market advances tend to occur with more dynamic leadership. Another similar trend which is probably not a healthy one is the trend toward the most liquid of the technology stocks. It appears that traders have no limits as to what they will pay for an Apple or a Google. This was what happened during the October 2007 top. Remember Las Vegas Sands?
These are but a few of the degrading internals. There are numerous examples including momentum which is for another day and/or another technician.
The market can surely advance as internals continue to degrade. My opinion is that this rally will not be subject to a quick reversal; but rather there will be optimal market behavior to convince the public that each dip is a buying opportunity. Sentiment will continue to stay bullish until a major top is put in.
Today’s Market
Today was a distribution day as the indices were down on high volume. Leading the way down was the above-referenced small caps. Gold was up on the face of a bearish market. The shape of the gold market is getting parabolic in shape. You want to be long such a market; but note that buying at these overbought levels is technically risky. This is in spite of the fundamental backdrop which is bullish.
Martin Goldberg
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