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Point & Go Figure: Participation Counts



They say that 70 percent of success in life is just showing up. This is especially true in court proceedings. The remaining 30 percent is hiring a good attorney. Right now, the Dow Jones Industrial Average and S&P 100 could each use a good attorney.

Yesterday, the Dow Industrials broke a triple bottom on a 25x3 scale, the first sell signal for this index since the October lows from where the recent rally began. Since the initial point and figure "buy" signal off the October lows on October 17 at 10,350, the Dow is up 4.47%, trailing both the S&P 500, up 5.65% and the Nasdaq Composite, up 8.78%.

On the one hand, it's almost pathologically funny that while the mass media has been holding their magnifying glass over Dow 11,000, the real movement has taken place in the Nasdaq Composite, and the Nasdaq-100, which is up nearly 10% over that same time frame.

The question now is whether the lagging group on the way up will be among the leading groups on the way down.

Dow Jones Industrial Average

It's not just the Dow that is in need of criminal representation. It is interesting to note that while the S&P 500 has cleared both the March and September price peaks, the S&P 100 remains below its March peak.

S&P 100 (OEX)

The Bullish Percent chart for the S&P 100, which is simply a measure of the percent of S&P 100 stocks on point and figure buy signals shows very clearly the aging process of this multi-year cyclical bull market rally.

Bullish Percent for OEX
This bullish percent chart shows that the percent of stocks on the OEX on point and figure buy signals peaked in September 2003, and has been deteriorating ever since from a very high risk level.

Now, here is a chart of the percent of stocks on the OEX trading above their 50-day moving average. The bearish divergence here shoud raise eyebrows. The level here is 82%, the highest level since December of last year, and even though the OEX Index remains below the March highs, the level here is well above both the March and June peaks for this indicator, all of which preceded selloffs.

Percent of OEX stocks above their 50-day moving average

Bottom line? Participation counts. And the participation in this market, which has been declining in point and figure terms for nearly two years now, is continuing to decline even as we enjoy the fruits of this rally. It may not matter right now, the way it hasn't mattered for a couple of years. But eventually it will. Topping is a process, not an event.

If you would like a chart reviewed, let me know here.

I have added text and illustrations to the charts where necessary.

All charts courtesy Dorsey, Wright & Associates.

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No positions in stocks mentioned.

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