Thursday, December 10, 2009

Momentum Improves; Financial Assets Grow

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On Thursday, the S&P 500 rallied 0.6%. Breadth was positive by a 5:4 margin and the up/down volume ratio was positive by a bit more than 3:2. Total volume decreased by 2% to its lowest level in over a week.

The daily Coppock Curve has taken on a bullish bias. Indeed, the oscillator has turned up for 13 of the 24 S&P industry groups; this compares with only four constructive groups on Wednesday. This is a bit of a surprise, but this improvement does not appear to be sustainable for long. We say that because 10 of the 13 groups are in overbought territory. Put another way, most of the “improvement” came about because a number of groups moved from “overbought and deteriorating” to “overbought and improving.” For a more robust rally to develop, we would prefer to see the strength develop from an oversold condition; that is obviously not the case here. Thus, we would not be surprised if the majority of the groups maintain a short term bullish bias for only a week or so, rather than the more normal 3-5 week expectation. Moreover, the weekly Coppock Curve is still in a distinct downtrend.

But improving is improving and 1087-1084 held yet again, so the post-November uptrend will continue to receive the benefit of the doubt. Moreover, the backing and filling of recent weeks may prove to be an Elliott Wave triangle or some other continuation pattern. Thus, the door is still open for a more serious test of the 1121-1156 range that we have highlighted as a significant resistance area.

As mentioned in yesterday’s post, the successful test of 1087-1084 generated a positive divergence in the hourly chart and an upside breakout by hourly momentum. With the improvement in the daily configuration, we will be need to be alert for negative divergences before the index is positioned to succumb to medium term pressures.

Household Financial Assets as a Percent of Total Assets

On another note, the Fed released its quarterly Flow of Funds data on Thursday; much of the data goes back to 1952. The data revealed that household financial assets represented 66% of total assets. That number has only been higher for 46 of the 213 quarters in the data. This suggests that this bear market rally is approaching – and may have already achieved – overvalued (oops, we mean overbought) levels.

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