January 20th, 2010

Too Good To Be True

I last took the “pulse” of the market, that is measured its internal health, breadth and depth, on December 17 in “This Damaged Market Is Ready for the ICU“. Just about a month has passed and the S&P has moved marginally higher (3.83%), 56.2% of stocks increased more than the S&P 500 Index and 74.7% of stocks are higher today than they were then.

But what do we know about the better-than-average movers. What we know is that, again, they were predominately low-priced stocks. Of all the stocks that increased at a rate more than the Index, 32.9% were under $5 and half were less than $10 per share on December 16. In addition, what can we say about the momentum of the average stock:

According to these momentum measures, the average stock has more positive momentum today than it had in mid-December. More stocks are making new highs, and fewer are making new lows. More stocks have crossed above their 200- and 300-day moving averages and more stocks have bullish alignments (price>50-dma>100-dma>200-dma>300-dma) than in December. The charts of fewer stocks today than a month ago have the mirror image, bearish alignments of their moving averages (only 166, half as many as in December).

And yet, rather than providing comfort, all this excellent momentum data makes me uneasy. While it just can’t get much better than this, I also feel this great momentum can’t continue forever.

Perhaps it is just what it looks like: a market that’s over-extended and needs to correct (unfotunately, I don’t have this sort of tracking data prior to March, 2009 so there’s no prior correction levels to compare against). These indicators and the market’s price action add weight to the notion that too many stocks have run too far ahead of where they ought to be:

We won’t have to wait much longer to get an answer to the question “Is the market heading into a correction?” We may have just hit the first bump in the road.

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  • Anonymous

    Guru,

    Might a small pullback and consolidation be the best thing for the market? Perhaps a few months or more of a flat market would be healthy.

    That said, are there any sectors you're looking at if we're still edging slowly towards 1250-1300 on the Dow?

    Steve K.

  • Jesse

    Joe, everyone I read using various methods of trading is saying the same thing you are here at 1150. I agree with you for the most part. The only thing I differ on is I think that we'll see more than a 17% correction and I think it will take a couple years, a slow gradual decline to new lows (below 666). We're in 1929 right now. "There may be a recession in stock prices, but not anything in the nature of a crash."Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929
    Are we in another bull market? compare 1982 to right now and it's very difficult to make the case that we are.

  • Joe

    Steve K., hello, it's been a while. It's all relative; while no stock or group will be totally immune from a correction, some will be less affected than others.

    A sector that looks particularly solid (especially after the vote in MA this week and the impact it will have on healthcare momentum in Congress) and less subject to a market correction are the HMO's, hospitals, nursing homes and specialize care stocks.

    You might also want to look at healthcare facility REITs since they pay a nice dividend in addition to price appreciation opportunities.

  • Joe

    Jesse, I wouldn't know today whether it's going to be a 17%, 30% or 60% correction to below 666…but do we need to know? We don't predict where the market will go, what we really need to know is when there's a significant change in the market's general trend and respond accordingly.

    For me, by the time the market's corrected 7%, I expect to have cut back to 50% cash. If it becomes a 15% correction, I plan to be at 75% cash. Along the way, I may add some SPX puts, SDS or calls on SDS to further insulate my portfolio.

    We don't really need to predict where we'll be a year from today, what we need to do well is actively manage our exposure and cash … if we do that, picking good stocks will take care of itself.

  • Anonymous

    Guru,,can you advise any healthcare facility reits,Healthcare etf`s you would buy this yr ?Thanks for any info.

  • Joe

    REITs: NHI, OHI, NHP and VTR

    HMOs: UNH, AET, WLP, HUM, HNT

    Outpatient: RHB, CNU, AMED, GTIV, HGR, DVA

    Nursing Homes: ENSG, BKD, KND, ODSY, SUNH

    Hospitals: HMA, THC, CYH, LPNT

    Rather than putting all your eggs into one of these baskets, assemble your own healthcare ETF composed of several.

  • Minnesotalee

    MAY BE MY LAST POST HERE: You JC where are you getting these numnbers? You have YET to provide any relevance to your wild predictions to the negative. This is not a bear market; you're completely out-of-touch with the technical indicators. Show me one technical indicator that supports any of your arguments. The only thing you have been right on is the 1150 high, but you have indicated this is the absolute high. I contend that we are in a minor correction but no where near the 17% and beyond that you have indicated. I would point out that your 17 number is correct but with the opposite sign. We need pullbacks, corrections, accumulations, etc on the way up. All these mean is a healthy BULL market. If you invest where your mouth is you'll be losing again. Remember we still have that bet and I'm afraid I have the edge with a two-sided head coin. I will challenge you right here on this blog site that my bull signal to your bear signal on the future direction of this market is the outcome, but don't feed me this negative crap without any TECHNICAL support to your argument. You have been doing this for as long as I have read your responses. For me I have produced these bull signals here for the last 6 months on this blog site. If you can convince me through outside support from this blog's contributors than I will go elsewhere. But if you can't produce sound technical reasons (not irrelevant outrageous 666 and below predictions and generalized historical anectdotes) then I think you need to move on. This is my challenge to you. Either I go or you!!! I think you provide no guidance technically to this blog's readers. I even welcome Joe to tell me where to go!

  • Joe

    Lee,

    Your free to go elsewhere at any time. But this is my blog and I can give my opinions whenever I want based on whatever reason, be they quantitative evidence or purely subjective. Remember, no one, not even you can predict the future.

    You're free to create your own blog to voice your own opinions with whatever evidence you have at any time.

  • Jesse

    Lee, no reason to be hostile. These are simply my opinions. I can give you a list of links to people I follow and read. I've talked about it before, but for your benefit I will repeat. I believe that the market will make a new low (below 666) based on EW theory. 1150 was major resistance for a long term bear trend from 2007. You have you're methods of trading and I have mine. I don't claim to be an expert and yes I have been short the market to early. But I fully believe that the long term trend from the high in 2007 is still down until the market proves otherwise. This week we fell below the 20 day MA which should now act like resistance. Oh and btw, I think we will reach an all time new high, but not til after a new low.

  • Jesse

    Lee, I'm not here to convince you. But read the table at this link – http://www.minyanville.com/articles/todd-harrison-markets-minyanville-stock-finance/index/a/26255.
    It lays out the case well as to why this is not a new bull market.

  • Joe

    And here I thought Lee was cursing at me, infering I thought I was JC and cursing at me.

    It goes to show how egotistical someone can actually get who has a fairly large and loyal readership of usually wonderful people.

  • Rebecca

    joe/guru:
    interested in your 'internals' calculation & tables. Can you tell me where/how you get the data?
    thanks
    blackstone

  • Joe

    Rebecca, thanks for the question. My data comes from the scanning feature of my Telechart charting software. It calculates all the moving averages, I generated the personal criteria (whether each chart confirms to the criteria, T or F) and then sort all stocks according to the criteria.

    The biggest challenge is trying to keep out of the stock list ETFs, closed-end funds, indexes and stocks no longer traded. While Telechart claims 6727 stocks, 1678 actually are in one of those categories leaving only 5049 true stocks or ADRs.

  • Minnesotalee

    As I stated earlier that this blogger (and guru Joe) is neither JC nor differing from my views. I found this blog site and firmly believe that the moving average theory works well in conjunction with my technical method. I find it as generally an excellent tool to confirm my theories. I do believe however Joe's MA methods have some lag built into it and using my own developed charting tool I find it comfort using Joe's as support. But when I find someone like JC always being om the negative side of Joe's and my technical analysis, then I question as to why he's contributing to this bullish call in the market. Remember Joe that there are many investors especially small ones that are scared to get in because of opinions that are not on our side of this issue. I just don't want readers of this wonderful blog to be hesitant about getting back in or all in. This is the time for your readers to feel good about the advice this theory of yours gives them. Lastly I am sorry for you thinking that I was bitching at you. You have given me a great gift in your fresh approach on technical analysis which I endorse. I will move on. Thanks for the ride and the opportunity to have my responses heard. Let's go to beyond SP500 of 1295 this quarter. I expect it to go much higher if the political climate co\ntinues to change. Brown has given me the next opportumity. Finally Joe (not JC) I wish you only the best and keep up the excellent and indefatigable work that you provide us readers.

    Respectfully,
    Lee from formerly of Minnesota

  • Joe

    Lee,

    Accept my apology. As I stated last, I thought your rant was aimed at me because I didn't make the connection were referring to Jesse as JC.

    Having said that, I rescind my invitation for you to find another blog (although you won't find any other with as good a track record or long-term perspective). And if you want me to beg that you stay and continue contributing then you have it.

  • Jesse

    no reason for anyone to leave. I will gladly walk away. Time will bear it all out. If I was long, I wouldn't want anyone pointing out the reasons to be worried either. I'd still love for your opinions on the link I sent you and the table that is on that link. It's very difficult to make a case that we are in a new bull market. Looks like we're set to take out another key support level today at 1114.

  • Anonymous

    Guru steel got killed last couple of days…hope it can bounce from here.

    http://finance.yahoo.com/q/bc?s=X&t=5d&l=on&z=m&q=l&c=STLD,NUE,AKS,ATI,TIE,FCX,PCU,BHP,VALE

    oildigger