December 18th, 2009

This Damaged Market Is Ready for the ICU

I haven’t taken its pulse, the market’s vital signs, for some time. Given its inability to advance above 1120 on the S&P 500 and being caught for the past four weeks in narrow channel, an ever tightening coiled spring ready to bust out in either direction, it’s time. What are individual stocks doing while bulls and bears are battling it out for control of the next momentum move?

The picture is not a comfortable one for the bulls. More and more stocks are jumping ship, abandoning the effort to push the market to higher levels and more and more are succumbing to the weight and beginning to join the bearish camp:

Ever since reaching a peak around October 19, when the S&P Index was at approximately the same level as it closed today, the number of stocks making 12-month new highs has declined from 510 to 141, the number of stocks over their 100-day moving average has declined from 77% to 52% and the number of stocks able to retain the “Golden Crosses” in their moving averages has declined from 70% to less than half.

On the flip side of the ledger, what’s the story among stocks that have rolled over?

Although still a small number, more stocks are making new lows as compared with the number on October 19 when the Index was at the same level. Even more alarmingly, the number of stocks that have rolled over their various moving averages has nearly increased since two months ago showing that downside momentum is growing stronger among average stocks (as contrasted with the large cap leaders).

Today, nearly half of stocks are now below their 100-day moving average, and more than a quarter are under their 200-day moving averages. As important as it was when we were watching the Bull Market emerging last spring, it is just as alarming to now see a continually growing number of stocks (currently 12%) to have made Black and Bear Crosses (the mirror images of Golden and Bull Crosses).

On December 3, in “Reversion to the Mean Still On Track”, I showed a possible flight path for the market modeled on the 1974 recovery. On November 22, in “Protect Yourself Against An Imminent Market Correction“, I spelled out a strategy using call options on the 2x S&P 500 Ultrashort ETF. And on November 20, in “One Reason the US Dollar Index Might Increase” we anticipated a reversal in the $US followed by a strategy based on a reversal of emerging market stocks with “Positioning for Year-End and Speculating with EDZ“.

I may have been early and you may not have understood or bought into the strategy I outlined but that’s o.k. since there are many other equally good ways of playing a market correction. But seeing the market’s vital signs continuing to erode, the time may be near to send this patient to the ICU.

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  • Charts and Coffee

    I always enjoy your unbiased perspective. One of the few opinions I value out there.

    Thanks.

  • Anonymous

    Ok, now I'm afraid. Very afraid.

    Steve in Los Angeles

  • Anonymous

    EDZ, TZA, FAZ, DRV…

    All VERY attractive ETFs that I'm presently pubbing' vigorously to all my family and friends. The strategy over the next 7 days, is simple: buy any or each on their dips.

    I personally have small positions in TZA and DRV.

    So, Steve, no need to be afraid (presuming our guestimations and concluding deductions prove correct).

    Doug in DC

  • Joe

    Doug, I'd agree with all except for DRV. Somehow, REITs are tending to hold their own, probably because of their dividends.

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