Tuesday, March 31, 2009

The Bear is Still in Control After Best Month Since 2000

What kind of a month was March? The S&P rallied 8.6%, which was the best monthly performance in nine years. Even so, the index recorded both a lower low and a lower high when compared to February. Despite March’s finish, the S&P recorded its sixth consecutive quarterly loss with a decline of 11.7%. According to our records, the six-quarter losing streak ties the all-time record.

While those stats may be interesting, we presented them in order to offer another comparison. Our favorite quarterly momentum indicator, which peaked in 2Q 2007, is positioned to remain weak through most (if not all) of 2010. The monthly indicator, which has been weak since October 2007, should not bottom until the second half of this year (perhaps as early as July). So, while we have recently been viewing the intermediate background in a favorable light, it is important to remember that, when compared to the long term trend (monthly data) and the very long term trend (quarterly data), the post-March rally is likely to be nothing more than a bear market rally.

Shorter term, Tuesday’s rally did little to heal the damage related to the recent downside reversal. The trend remains down, short term momentum is still weak, and the put/call ratio is overbought and deteriorating (as are most stocks). Thus, the market likely needs more time to correct its recent gains before it is positioned to continue its bear market rally.

For Elliott fans, the above thoughts suggest that the just completed rally was an “A” wave, the index is now in a “B” wave pullback, and a “C” wave to new bear market rally highs is yet to come.

First (chart and Fibonacci) support is at 775-766 (with particular focus on 773-772), followed by 750, and 730-725. For now, the only resistance worth considering is Thursday’s 833 high. Utilities, Healthcare, and Consumer Staples are currently showing the best short term relative strength characteristics.

Monday, March 30, 2009

Trend Reversal

We have been suggesting that near term momentum was positioned to take on a bearish bias by the end of March, even as short term sentiment (as measured by the 10-day put/call ratio) was overbought. This helped us to conclude that a break below 792 would be a breach of both chart and trend support and would open the door for a deep retracment of March’s gains. Today’s 3.5% decline triggered both the momentum reversal and the violation of key support. Therefore, lower lows are likely – possibly into mid April (just as many people are writing out those checks to the IRS).

Given that notion of lower lows, we will monitor the S&P’s ability to handle chart (and Fibonacci) support at 775-766 (with particular focus on 773-772), 750, and 730-725. For now, the only resistance worth considering is Thursday’s 833 high. Utilities, Healthcare, and Consumer Staples are currently showing the best short term relative strength characteristics.

For Elliott fans, the March 6-26 rally pattern is almost certainly corrective in nature. A break below 773-772 would confirm this “bear market rally” structure. However, intermediate momentum is solidly positive for a great majority of the stocks within the S&P 500. This makes us think that the just completed rally was an “A” wave, the index is now in a “B” wave pullback, and a “C” wave to new bear market rally highs is yet to come. The risk, of course, is that surprises are typically to the downside in a bear market.

Sunday, March 29, 2009

Our weekly newsletter is now available. If you care to receive a copy, please e-mail me at wgmurphyjr@gmail.com or post a comment on the blog (with an e-mail address) requesting a copy.

The newsletter includes comments on stocks, bonds (and yields), the US dollar, and commodities. Below is the newsletter's Plain English summary for stocks:

Last week’s rally was a solid performance. Twenty-three of the 24 S&P 500 industry groups advanced and the index itself gained 6.2%. The index is now on a three-week winning streak (the longest since last August) and the 19.4% gain over those three weeks is the strongest since 1938. Short term momentum has effectively confirmed the rally, and intermediate indicators have improved every week. While this “good overbought” condition suggests that higher highs are likely in coming weeks, the Elliott Wave structure of the advance is increasingly corrective (counter-trend) in nature. This, plus the fact that short term momentum is positioned to assume a bearish bias during the coming week, suggests that a potentially deep “B” wave decline could be close at hand.

Thursday, March 26, 2009

Tick Tock

In our weekly (and monthly) newsletters we made the case that the market was positioned for its best rally since the 2007 bull market peak. We believe that is a realistic possibility -- and that the rally from the March low is part of a larger uprtrend. However, nothing goes straight up and this post-March rally appears to be on its last legs.

That said, Thursday was a good day. The S&P rallied by more than 2.3% and -- in contrast to Wednesday -- underperformed breadth. While total volume fell, the upside to downside volume ratio expanded nicely. BUT, despite all this, the caution we expressed in Wednesday's post is still present. Near term momentum for both the S&P 500 and a majority of its 24 industry groups is still positioned to begin deteriorating by the end of the month, the put/call ratio is overbought, and a case can be made that this afternoon's surge was a breakout -- or a thrust -- from a triangle. The Elliott Wave analyst in us thinks that this thrust is a last gasp, not the acceleration needed to rescue the structure of the rally. We remain of the view that the rally's structure is corrective (counter trend) and subject to a deep retracement.

All that said, the S&P remains above its dominant hourly post-March uptrend line, which is currently near 803. Thus, a decline decisively below 792 hourly would violate both chart and trend support and pave the way for further weakness toward 770 and perhaps lower. First resistance is at 850. Second resistance is 875; a rally through that level would be significant development.

Wednesday, March 25, 2009

Skating on Thin Ice?

The major averages posted modest gains today on better volume. However, the averages outperfomed breadth. We would rather see the opposite; the generals leading the troops could be a sign of a tiring rally.

The overlapping structure of the rally makes it difficult (if not impossible) to count the pattern from the March low as an impulse wave (i.e., a trending move) in Elliott Wave terms. The rally could rescue itself with an upside acceleration in the next few days. But near term momentum is postioned for a downside reveral for most groups before the end of the month and and the 10-day p/c ratio is overbought. These conditions argue against such an acceleration and suggest that the rally is now skating on thin ice. Moreover, the increasingly evident corrective (counter-trend) Elliott structure implies that a reversal could lead to a deep retracement.

S&P support is evident at 770-800. First resistance is at 850. We would view a rally through 875 as a significant (bullish) development.