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Point & Go Figure: Midweek Market Review


Sometimes beauty is only skin deep


Market Overview:
The short-term conditions remain largely negative for the majority of stocks. The NYSE and Nasdaq Composite Percent Above 50-day Moving Average Indicators are both in columns of Xs, but as the charts below show these indicators are in corrective mode having recently exceeded previous columns of Os on the downside and the field position near 70% is very high risk.

NYSE Percent Above 50-day
(Chart courtesy
Dorsey Wright)

Nasdaq Composite Percent Above 50-day
(Chart courtesy
Dorsey Wright)

The indicators above deteriorated significantly on Tuesday, each down more than 2%. Meanwhile, the High-Low indices, according to data from Investors Intelligence, remain negative, in columns of Os, a negative divergence from the recent reversal in the 50-day MA indicators and indicative of a corrective move higher.

Wait, how can the recent move in the broad indices be characterized as "corrective" with most major indices at or near new highs? Remember, the broad indices are not democratic. It takes very few stocks to influence the movement in the capitalization-weighted S&P 500. What the longer-term PnF bullish percent indicators have been saying for months is that each new leg higher in the broad indices is being driven by fewer and fewer stocks. What the short-term indicators are saying now is that this "interior" technical deterioration in the stock market is becoming more pronounced, and consequently more dangerous.

In an interview with Barry Ritholtz recently Paul Desmond of Lowry's Reports noted that at major market tops (using the Dow Jones Industrial Average), on the day the Dow hits its peaks, on average fewer than 6% of stocks in the market as a whole are making new highs along with it.

The bullish percent charts do not measure stocks making new highs in the market, only stocks on PnF buy signals. However, the principle is the same. At important market tops, technical deterioration frequently occurs in stocks over indices.

Since most people own stocks, not indices (despite the best efforts of many mutual fund indexing companies), they often feel technical deterioration BEFORE it appears in the broad indices. This often takes on the guise of underperformance versus the market averages. As fewer and fewer stocks carry the indices to new highs, their portfolios participate less and less. Ironically, this ratchets up the risk appetite for investors. Just when the technical deterioration in stocks should be warning them to become more risk averse, they instead seek to take on more risk to avoid "missing out" on the excellent market performance that the broad indices seem to be broadcasting each day in the market.

Presently, the PnF indicators are warning that investors should be monitoring risk closely and becoming more risk averse.

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No positions in stocks mentioned.

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