Weekend Update, November 15th, 2009

As I posted a few days back, one or more of the oscillators for the SG on the $SPX is about to have a bullish confirmation. It could/should happen early in the week. I’m not sure it’s going to happen and I’m not sure it’s going to mean much.

As everyone knows, there are some serious problems going on within the market today. This last rally leg has occurred on increasingly lighter volume. The financial sector and the small caps are not participating overtly and the $COMPQ is not participating covertly. This past Thursday, the 11th, the $COMPQ drew within 11pts of its rally high of 2190 set on 10/23, but did so with only 43% of the stocks in that index holding above their 50MA’s. Look at the $NAA50R and notice that only 38% of the stocks within the $COMPQ are currently above their 50MA’s. There is just no participation. The $COMPQ is being carried up by fewer and fewer stocks. You could say that this is what happens at bottoms and maybe that’s what’s going on, but I’m skeptical.

And don’t stop with the $COMPQ. Take a look at the $SPXA50R, the $NYA50R, and the $NDXA50R and you will see the same kind of disparity. I can only imagine what I would find if there was a way to track similar data inside the $RUT.

How hard is it to pump the $INDU with its 30 stocks? Not hard at all. How hard is it to pump the $NDX with its 4 stocks? Not hard at all. It’s no simple feat to push the broader indexes to new highs with fewer and fewer participants, and yet it is being done. How long can this go on? Probably as long as the pro’s want it to go on. But one thing is certain. Either participation improves or the markets will collapse under their own weight. Period.

And then there’s the COT Report. According to the latest report, the S&P large contract commercial hedgers unloaded 5,504 long side contracts but only covered 1,467 of their short contracts leaving them net short, as of this past Tuesday, 62K contracts. That is the largest net short position they’ve had in quite some time. It may be the largest net short position they’ve had since the late May or early June. I think that is the case but you can check for yourselves. Essentially it’s like this: The more the big commercials sell, the more they make. It is a win/win situation for them but clearly they are betting more heavily on the short side now than they are on the long side.

And then there’s the $. If you ever hear one of the Fed Heads say that a weak $ has been good for the economy, then that will be the day the $ starts to strengthen. Until then, expect the $ to weaken further and as the $ weakens, our markets tend to go up. But then there are all those big players in the futures who have bet that the $’s slide is near its end. Time will tell.

I have added several new tools to my tool kit. One is the Summation Index and I find that I’m becoming more and more concerned with the lack of confirmation by the Summation Index with regard to this last rally leg. In the past, the Summation Index has confirmed each of the rally legs by making an abrupt U-turn and heading up with the rally. It isn’t doing so this time. It tries but just can’t seem to get going. That should be no surprise with the lack of participation. This has to change…soon. The Summation Indexes for the $NYA and the $COMPQ have to break out of their sideways paths one way or the other, up or down. If they don’t very soon head up, then they’re just going to head down, with the market. I am watching the Summation Indexes like a hawk and you should be, too.

Along these same lines, I have started using Bollinger Bands with the $NYMO and the $NAMO. As interesting as the $VIX with BB’s.

I’ve also added the following tools:

$NYUPV
$NYDNV
$NYUD
$NYAD

I mentioned a couple of these the other day and this weekend I’ve been back testing them to the first of the year. They give some very interesting signals. I have had trouble in the past calling climax signals on the SG’s but with these tools I don’t think I’ll be having that problem anymore.

I highly recommend you go to Stochcharts, pull up landscape-size charts of each of these along with a chart of the $SPX and establish parameters for extreme readings which you will find lead to either buy or sell signals. One thing I will tell you about $NYUPV is that early in the year sell signals came when it would hit the 1600 area or higher, but after the middle of May sell signals started hitting when the $NYUPV hit the high 1200’s to low 1300’s and even in the 1100’s. I’m not exactly sure why this is.

I have found that when two or more of these gauges hit extreme readings, then the buy or sell signal that is generated is very powerful. Many times, if not every time, the buy signals come after heavy distribution days where the indexes come down hard on volume and close at the lows. September 1st and October 1st come to mind. Inversely, the sell signals tend to come when the market rallies hard and closes up at the highs. You can easily see this in the last week of October through to the close on November 13th.

As of right now, three of these gauges gave ‘sell’ signals on November 9th, $NYDNV, $NYUD, & $NYAD. It will be interesting to see if these signals prove to be correct and if they lead to a buy signal in the days ahead.

Lowry’s Data is updated.