Technical Stock Market Report

The good news is:  The NASDAQ composite (OTC) closed at a multi year high Friday and the S&P 500 (SPX) closed at an all time high on Thursday.

When my weekly forecasts are wrong it is usually because they are too negative and recently there have been a string of wrong forecasts.  The forecasts are based on technical and seasonal factors and some of the technical indicators have never been as weak as they have been for the past several months. 

I believe the problem has been caused by the Fed.  They pushed the real estate market up until it collapsed of its own weight in 2007 and now they are pushing the financial markets, especially the bond market to otherwise unjustifiable levels.

New highs indicate the breadth of leadership of a market advance.  An expanding new high list indicates a robust market.  Recently, as the blue chip indices have been hitting new highs the new high lists have been shrinking.  This is true even in the bond market.

There are 67 Mutual funds in the FastTrack database (http://investorsfasttrack.com/) holding corporate bonds exclusively.  The chart below covers the past year showing the average price of those funds in red and a 10% trend (19 day EMA) of those funds hitting a new high for the past month in green.  The number of new highs has been declining since March while the average has been going to new highs.  Dashed vertical lines have been drawn on the 1st trading day of each month.

There are 185 funds in the FastTrack database specializing in junk (high yield) bonds.  The chart below is similar to the one above except it shows an average of the junk bond funds in red and new highs in green were calculated from the junk bond fund list.

Marty Zweig said “Don’t fight the Fed” and that has been good advice.  However, at some point the Feds imprudence in the financial markets is likely to yield the same result as their imprudence in the real estate market.

The negatives:  New highs picked up last week, but remain near their recent lows of the past 2 years.

The chart below covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. 

OTC NH rose last week.

The next chart is similar to the one above except it covers the past year.

The next chart is similar to the one above except it shows the period from 2/2007 to 2/2008.  OTC NH began declining several weeks prior to the 2007 top.

The next chart is similar to those above except it shows the period leading to the March 1994 top.  OTC NH collapsed about 6 months prior to the final top.

The next chart shows the lead up to the 1987 top.

The next chart is similar to the first one in this group except it shows the SPX in red and NY NH has been calculated from NYSE data.

NY NH also picked up nicely last week.

The next chart is similar to the one above except it covers the past year.

The SPX hit an all time high last Thursday with only a few issues in the new high list.

Advance Decline Lines (ADL) are a running total of declining issues subtracted from advancing issues.  Their behavior varies and changes.  There is often a bias shift from positive to negative near cyclical tops.

The chart below covers the past 6 months showing the OTC in blue and an ADL calculated from NASDAQ data in green.  There has been a negative bias in the ADL for the past 6 months that has accelerated in the past 6 weeks.

The positives:  Last week new lows declined to insignificance.

The chart below covers the past 6 months showing the SPX in red and a 40% trend (4 day EMA) of NYSE new highs / (new highs + new lows) (NY HL Ratio), in blue.

NY HL Ratio continued climbing sharply last week.

The next chart is similar to the one above except is shows the OTC in blue and OTC HL Ratio, in red, has been calculated from NASDAQ data.

OTC HL Ratio leveled off well into positive territory.

Money Supply (M2)

The money supply chart was provided by Gordon Harms.

M2 growth fell again last week.

Conclusion

The market continued its rally on narrow leadership and I have no idea how long this will continue.

I expect the major averages to be lower on Friday August 29 than they were on Friday August 22.

Last weeks negative forecast was a miss.

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Disclaimer: : Charts and figures presented herein are believed to be reliable but I cannot attest to their accuracy.  Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus and the Wall Street Journal (wsj.com).  Historical data is from Barron’s and ISI price books.  The views expressed dare provided for information purposes only and should not be construed in any way as investment advice.  Furthermore, the opinions expressed may change without notice.

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