Six Measures of Market Internals

As investors ring in the old year, trading volume should remain light until battle-weary traders return after the holidays. Ergo, not much weight should be placed on market movements during this “thin” period; the S&P 500 Index probably won't deviate much from its 3-week trading range.


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Investors won't not only be hung over from 2008’s financial rout, but will also be grappling with the vital question: What's the most likely direction for the stock market?

I've analyzed a number of fundamental and technical considerations in my recent articles, including After the Rate Cut, Tide Turning for Stocks? and Stock Markets in No Man's Land.

Additionally, breadth indicators are also useful tools to assess the inner workings of the market’s rallies or corrections, and are discussed in this article. These indicators are used to identify the strengths or weaknesses behind market moves, such as the rally since late November - i.e., to assess how the bulls and the bears are exerting themselves.

First, a quick review of the stock market scoreboard. The MSCI World Index and the MSCI Emerging Markets Index have improved by 18.7% and 21.9% respectively since the November 20 lows. As far as the US markets are concerned, the Dow Jones Industrial Index has gained 14.8% since the low, the S&P 500 Index 18.4%, the NASDAQ Composite Index 17.8% and the Russell 2000 Index 25.3%.


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Although the MSCI Emerging Markets Index and the Russell 2000 Index now qualify as being in new bull markets (at least in terms of the traditional definition of a 20% rise), all indices still have an exceedingly long road ahead to regain start-of-year and top-of-bull-market levels.

The table below shows the key resistance and support levels for the major US indices. After having flirted with their respective 50-day moving averages earlier in December, all the indices are again at these resistance levels. The next targets are the November 4 highs, followed by the key 200-day average (not shown on table). On the downside, the December 1 (not shown) and all-important November 20 lows must hold for the uptrend to remain intact.


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