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Dallas, TX
November 11, 2009, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Watching The Market's Internal Workings
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What's Hot Today: |
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U.S. stock index futures were higher on Wednesday morning.
Global markets were mostly higher overnight. With no economic data out
today due to Veteran's Day, the market may move higher on Momentum. Our
thoughts and prayers go out to all Veterans and their families, especially
those of Fort Hood, Texas.
Today's Economic Calendar:
- No economic data released. It's Veteran's Day.
News For Thought
China: Credit card debt on the rise. China's young consumers may find
themselves in trouble if current credit card trends in the country continue.
According to CNN.com: "Credit card issuance is up 32 percent in China in the
past year, according to China Market Research and the National Bureau of Statistics.
Credit card debt is up more than 130 percent to $838 million. That still pales
compared to U.S. credit card debt, but the quick rise have some observers alarmed." The
problem is that the rise in domestic consumption, spurred by the need for growth
in the economy as exports have slowed "with money the consumers didn't have.
In the first six months of this year, the number of Chinese consumer with credit
card debts more than two months overdue rose 133 percent." There are no bankruptcy
protection laws in China, so some of those with large enough unpaid debts could
end up in jail.
Health care fixes in Maine have spawned new problems. According to The
New York Times: "Maine is the Charlie Brown of health care. The state’s legislators
have tried for decades to fix its system, but their efforts have always fallen
short: health insurance premiums are still among the least affordable in the
nation, health care spending per person is among the highest and hospital emergency
rooms are among the most crowded. Indeed, many overhauls to the system have done
little more than squeeze a balloon — solving one problem while worsening another." In
fact, as the Times reports: "Many of the reform proposals circulating on Capitol
Hill have already been tried in Maine."
Voting with his feet, AIG CEO is considering leaving the company. According
to The Wall Street Journal: "AIG's CEO is considering stepping down, just three
months after taking the job. Benmosche is chafing under constraints imposed by
government overseers, particularly a recent compensation review."
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Watching The Market's Internal Workings
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Can This Rally Fully Recover?
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The broad indexes, such as the small stocks in the Russell
2000 index (RUT) and the S & P 500 have been lagging the narrow indexes such
as the Dow Jones Industrial Average (INDU). This suggests that money is chasing
a smaller number of stocks in this market, and it could be a sign of possible
trouble at some point in the future.
Chart Courtesy of StockCharts.com
Still, there are multiple ways of looking at this. The conventional way is that
this may be a technical divergence, where the lagging action in the small stocks
is a sign of internal market weakness. If you buy into this argument you are
expecting an eventual decline in all stocks at some point in the future. And
that makes sense, if the situation remains in place long enough and if other
signs of market weakness appear; more on that in a minute.
Chart Courtesy of StockCharts.com
The flip side is that the small stocks are building a base that they will use
as a springboard as the January effect, the time period at the turn of the year
in which small stocks are supposed to outperform large stocks, nears. This would
be the preferred argument if you are bullish on the market.
To make sense of this opinion divergence, we can use some time tested breatdh
and momentum indicators. First, we have the NYSE advance decline line (NYAD).
It’s currently within a good two or three days from making a new high. This suggests
that the overall market trend has not turned decidedly lower.
Chart Courtesy of StockCharts.com
Next, you have the number of stocks making new 52-week highs on the NYSE (NYHL).
This measure has actually improved in the last few days, suggesting that money
is still moving into stocks and that stocks that have appreciated in price are
still doing so. So far so good, as momentum looks to be alive and well.
Chart Courtesy of StockCharts.com
If you want to take the argument a bit further, you can look at the Nasdaq advance
decline line (NAAD). Some fund managers, such as Stadion's Greg Morris, now look
at the Nasdaq A-D line instead of the NYSE A-D line. The argument is that the
NYSE A-D line is too polluted by ETFs, preferred stocks, and bond like instruments
that distort the message. The Nasdaq has fewer of these "other" instruments trading
on it, so that it gives a better picture of stock market breadth and momentum.
In this case, the Nasdaq A-D line, is painting a worse picture than the NYSE
A-D line. Since the Nasdaq is where large numbers of small stocks trade, it also
backs up the notion that the blue chips are starting to attract larger portions
of the money available, and that at some point the advance will be unsustainable.
Chart Courtesy of StockCharts.com
Here's another angle, the Dow Jones Industrial Average (INDU) and the Nasdaq
100 Index (NDX) are performinb better than the small stocks and the S & P
500. The Industrials and the Nasdaq 100, account for 130 or stocks, give or take
a few such as Intel that are in both indexes, while the Russell 2000 is home
to nearly 20 times that number of companies and the S & P 500 is home to
another 500 or so stocks.
More money is moving into a handful stocks than into the broad market. This is
supported by both index performance and breadth data from the NYSE and the Nasdaq.
The question for investors is whether we are starting to see a classic technical
divergence develop in the stock market, where the advance is including fewer
stocks, a sign that at some point the rally will end badly.
Conclusion
The conclusion is fairly simple. The stock market’s rally is still alive, but
seems to be getting narrower. Small stocks are not participating as well as large
stocks, and the big money is moving into 130 very large stocks, those in the
Nasdaq 100 and in the Dow Jones Industrial average. More important is the fact
that if you look at the indexes as single packages, you may get a tilted view
of the market as some of the stocks in the major indexes are acting much better
than others.
Major market tops take a while to form. And it's not clear if we are starting
to build one, although it's foolish to think that we aren't in some stages of
the process of building a significant top.
If the small stocks recover, and the Nasdaq A-D line improves, the rally would
be healthier, and would have a chance of lasting longer.
Yet, if things continue in their present course as the traditionally bullish
November and December months progress, we could be in for a tough spring in the
stock market.
Know when to sell and how to make money when the market falls. Get a detailed
trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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Bargain Hunters Chase Altria Group (NYSE: MO)
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Altria Group
(NYSE: MO) is no longer a member of the Dow Jones Industrial
Average (DJI), but it's still making big moves.
Chart Courtesy of StockCharts.com
It's a known adage in investment circles that when times
get hard consumers will still find a way to buy beer and
cigarettes. And that's when Altria Group comes in handy
to portfolio managers who don't mind investing in vice
related stocks.
Altria is the tobacco arm of the old Philip Morris Inc. and is the purveyor of
Marlboro and smokeless tobacco products, after its recent purchase of UST. But
the stock had been languishing until Barron's recently profiled it as a bargain.
It's got all the prerequisites of a bargain too, with a low P/E ratio, of 10
or so on forward earnings, and a nice dividend of somewhere near 7%.
It also has momentum, as the stock broke to a new high on Tuesday.
More than anything, though, the rally in MO may be a sign of the times, as investors
may be thinking that the economic malaise isn't going anywhere fast, and that
cigarettes may be a staple that some folks can't do without.
This is a classic example of a traditional view on investing during a tough economy.
We are neither recommeding the sale or the purchase of MO. The purpose of this
article is to educate subscribers as to the presence of an interesting trend
in the market. Dr. Duarte does not own shares of MO. |
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Technical
Look at the Market |
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S & P Still Has Eyes For 1100
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The S & P
500 closed just below 1100 on 11-9 and 11-10, and may
still be gathering steam for another move toward the
key resistance level.
Yet, the market is still not showing the strength that it was showing a few months
ago. That, of course, is to be expected, especially after a huge move from the
March bottom.
Still, you'd like to see a bit more life in stocks at this point. The drug stocks
have been fairly decent movers of late, while energy stocks also rallied on 11-9
but went nowhere on 11-10. Big tech stocks were mixed.
Chart Courtesy of StockCharts.com
The technical picture may be about to be decided, though.
If the S & P 500 can actually take out 1100 in a big
way, we could see significantly higher prices in stocks,
at least for the short term, as momentum money piles on.
Chart Courtesy of StockCharts.com
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