Big Picture Review
By
Rennie on Monday, February 2nd, 2009 at 9:15 pm
Back in mid-October, I reviewed five key long-term indicators that all signaled the potential for trouble long before it manifested in the form of sharply lower prices. These five are especially useful as the inputs are not part of any other ‘big picture’ indicator, so there’s no correlation from one indicator to the next. It’s been 3 1/2 months, so let’s take another look to see if anything’s changed…
Market Vane: One of the best sentiment surveys out there, published by the folks at Market Vane, this survey tracks the sentiment among commodity trading advisors. It’s performed very well over the past decade, holding above 50% bulls during market advances and below 50% during market declines (see long-term chart). As of last week, this survey remained in bearish territory at 38%, the 34th consecutive weekly reading below 50%, indicating this group of smart money investors does not see signs of a sustainable bottom.
Up Volume – Down Volume: A simple 200-day moving average of daily up volume minus down volume is a highly effective gauge of the market’s overall trend (see long-term chart). Sustained readings above zero indicate better buying power at work, while readings below zero reflect better sellers. It’s particularly interesting that there’s no lag between this indicator and the S&P, despite the fact that the indicator is based on the last 200 sessions. This suggests the raw data functions as a lead indicator. If a rally does manifest over the next few months, this will definitely be an indicator to watch in terms of how close it gets to the zero level (much less over zero).
Cumulative TICKscore: A daily version of our intraday TICKscore indicator that’s calculated by keeping a running total of closing TICKscore readings. While the indicator has been making higher highs recently, step back to look at the long-term chart and it’s hard to make the case that the bearish trend has turned. At the least, the Cumulative TICKscore needs to take out its January top, at which point I’d consider the longer-term trend ‘neutral’. To actually turn it bullish, it needs to convincingly change the longer-term trend of lower highs. That would mean a move above the top from last November.
Nasdaq/NYSE Volume Ratio: The 20-day moving average of this ratio finally moved out of extreme territory (>1.50) late last year, which helped the market put in a bottom in November. The oddly out-of-place speculative frenzy that was in effect throughout most of 2008 has abated somewhat, opening up the potential for an intermediate-term rally. But from a ‘big picture’ view, this ratio isn’t nearly low enough to generate any real excitement. Look at the long-term chart and note the periods throughout 2002-2006 when the 20-day average of the Nasdaq/NYSE Volume Ratio traded south of 1.20. Those represented periods in which speculative participation was truly at a low point, which is exactly what you’d want to see from a contrarian standpoint. Given the brutal decline in 2008, even before Q4, it was an especially negative sign that speculative participation remained unusually high. And it’s once again negative that in light of the market’s cliff dive in Q4, we’re still not seeing investors give up as we did in late 2002. That’s probably still coming.
The Last Hour: It’s retraced about 70% of the 2005-2007 selloff (see long-term chart), which is positive in the sense that an end is in sight, but negative in the sense that there’s probably further downside in store over the long haul. This indicator of smart money activity, which compares the market’s performance during the first and last hour of the trading day, provided a major heads-up regarding the market’s longer-term prospects when it started falling like a rock in 2005. It will move out of bearish territory when the retracement is complete, which will be a major accomplishment when it happens, although ‘when’ is the key word. Back at the end of 2001, it looked like the Last Hour was going to retrace the entire 2000 decline in short order, but the indicator soon flipped back down during the six-month rally from September ’01 – March ’02. It didn’t completely retrace the 2000 decline until early 2003.
Does the almost universally bearish outlook from our various long-term indicators mean that the recent spike in program trading activity won’t/can’t lead to the type of traditional six-month rally that we’ve seen at previous spikes? Not in my opinion. In 2001, for instance, the S&P staged a couple of multi-month rallies despite all of the indicators above trading in bearish territory. The generally gloomy outlook does indicate, however, that if the spike in program activity proves correct and the market does grind its way higher into midyear, it will most likely end up representing another longer-term selling opportunity.
Big Picture Review
By Rennie on Monday, February 2nd, 2009 at 9:15 pmBack in mid-October, I reviewed five key long-term indicators that all signaled the potential for trouble long before it manifested in the form of sharply lower prices. These five are especially useful as the inputs are not part of any other ‘big picture’ indicator, so there’s no correlation from one indicator to the next. It’s been 3 1/2 months, so let’s take another look to see if anything’s changed…
Market Vane: One of the best sentiment surveys out there, published by the folks at Market Vane, this survey tracks the sentiment among commodity trading advisors. It’s performed very well over the past decade, holding above 50% bulls during market advances and below 50% during market declines (see long-term chart). As of last week, this survey remained in bearish territory at 38%, the 34th consecutive weekly reading below 50%, indicating this group of smart money investors does not see signs of a sustainable bottom.
Up Volume – Down Volume: A simple 200-day moving average of daily up volume minus down volume is a highly effective gauge of the market’s overall trend (see long-term chart). Sustained readings above zero indicate better buying power at work, while readings below zero reflect better sellers. It’s particularly interesting that there’s no lag between this indicator and the S&P, despite the fact that the indicator is based on the last 200 sessions. This suggests the raw data functions as a lead indicator. If a rally does manifest over the next few months, this will definitely be an indicator to watch in terms of how close it gets to the zero level (much less over zero).
Cumulative TICKscore: A daily version of our intraday TICKscore indicator that’s calculated by keeping a running total of closing TICKscore readings. While the indicator has been making higher highs recently, step back to look at the long-term chart and it’s hard to make the case that the bearish trend has turned. At the least, the Cumulative TICKscore needs to take out its January top, at which point I’d consider the longer-term trend ‘neutral’. To actually turn it bullish, it needs to convincingly change the longer-term trend of lower highs. That would mean a move above the top from last November.
Nasdaq/NYSE Volume Ratio: The 20-day moving average of this ratio finally moved out of extreme territory (>1.50) late last year, which helped the market put in a bottom in November. The oddly out-of-place speculative frenzy that was in effect throughout most of 2008 has abated somewhat, opening up the potential for an intermediate-term rally. But from a ‘big picture’ view, this ratio isn’t nearly low enough to generate any real excitement. Look at the long-term chart and note the periods throughout 2002-2006 when the 20-day average of the Nasdaq/NYSE Volume Ratio traded south of 1.20. Those represented periods in which speculative participation was truly at a low point, which is exactly what you’d want to see from a contrarian standpoint. Given the brutal decline in 2008, even before Q4, it was an especially negative sign that speculative participation remained unusually high. And it’s once again negative that in light of the market’s cliff dive in Q4, we’re still not seeing investors give up as we did in late 2002. That’s probably still coming.
The Last Hour: It’s retraced about 70% of the 2005-2007 selloff (see long-term chart), which is positive in the sense that an end is in sight, but negative in the sense that there’s probably further downside in store over the long haul. This indicator of smart money activity, which compares the market’s performance during the first and last hour of the trading day, provided a major heads-up regarding the market’s longer-term prospects when it started falling like a rock in 2005. It will move out of bearish territory when the retracement is complete, which will be a major accomplishment when it happens, although ‘when’ is the key word. Back at the end of 2001, it looked like the Last Hour was going to retrace the entire 2000 decline in short order, but the indicator soon flipped back down during the six-month rally from September ’01 – March ’02. It didn’t completely retrace the 2000 decline until early 2003.
Does the almost universally bearish outlook from our various long-term indicators mean that the recent spike in program trading activity won’t/can’t lead to the type of traditional six-month rally that we’ve seen at previous spikes? Not in my opinion. In 2001, for instance, the S&P staged a couple of multi-month rallies despite all of the indicators above trading in bearish territory. The generally gloomy outlook does indicate, however, that if the spike in program activity proves correct and the market does grind its way higher into midyear, it will most likely end up representing another longer-term selling opportunity.