Wednesday, June 17, 2009

Market Internals Of Interest

I thought it would be interesting to review some charts pertaining to market breadth. I will also present one chart of market sentiment.

Figure 1 is a weekly chart of the S&P500 (symbol: $INX), and the indicator in the bottom panel shows the percentage of NYSE stocks trading above their 40 day moving average. The number of stocks above their 40 day moving average peaked at 92% five weeks ago. Above 90% is high, especially in a bear market, and I pointed this out in the April 12, 2009 commentary. Over the past 5 weeks, price continued higher while the number of stocks above their 40 week moving average decreased. This negative divergence shows market weakness under the surface.

Figure 1. % Of Stocks > 40 d MA/ weekly

Figure 2 is a daily chart of the S&P500 (symbol: $INX). The indicator in the bottom panel comes from mathematician James Meikka. Meikka developed a formula to measure advancing and declining issues that prevents drift and forces it to maintain a consistent relationship with the zero line. It is like a McClellan Summation Index. Instead of applying the indicator to advancing and declining issues, I am utilizing NYSE up volume versus down volume in figure 2 (the data is hidden). So my indicator in the lower panel is a measure of advancing volume versus declining volume. The indicator is heading downward suggesting that selling pressure is dominating the price action. The indicator has been heading lower while the price action has been heading higher - another negative divergence. The chart goes back to 2007, and recent crosses are shown with the vertical black lines.

Figure 2. NYSE Up Volume v. Down Volume/ daily

Figure 3 is a daily chart of the S&P500 (symbol: $INX). The middle panel compares the Rydex bullish leveraged assets (green line) to the Rydex bearish leveraged assets (red line). The Rydex leveraged assets is one of my favorite indicators as it not only tells us what direction traders are leaning but to what degree they are doing so with conviction (i.e., use of leverage). In general, we want to bet against the consensus. Not surprisingly, the amount of money in the bullish and leveraged assets has been twice as much than in the bearish and leveraged assets in 4 of the last 11 trading days. This is shown in the indicator in the lower panel which is just a simple ratio of bullish and leverage to bearish and leverage assets. Typically, the market will find a bottom when this ratio is less than 1, which means the bears are getting too greedy.

Of note and maybe a word of caution, the last time this ratio was above 2 was December, 2007 and early January, 2008, and the time before that was October, 2007. Those are two periods that will be part of market lore someday.

Figure 3. Rydex Leveraged Bull v. Leverage Bear/ daily


Tyler said...

Excellent work Guy. thanks

Guy M. Lerner said...

Thanks T!!