Rally Continues

Last Friday I said we should be looking for a short-correction because the CVI (Climactic Volume Oscillator) was very overbought, and prices were approaching overhead resistance. There was a very small correction, but prices kept moving higher, while the CVI zigzagged at overbought levels. We also observed the STVO (Short-Term Volume Oscillator) move down from overbought to neutral. This is the kind of thing that happens in bull markets, and bear market rallys. There is no guarantee that this bullish behavior will continue, but I suspect that it will.

Now medium-term indicators are reaching overbought levels -- see the VTO above and the intermediate-term breadth and volume indicators below. Clearing this overbought condition will be more difficult than the short-term clearing was.

Further complicating the issue is the overhead resistance. The market has reached the resistance line at the same time that internals have become overbought. A breakout at this time would be a very bullish sign; however, a real pullback, allowing the buildup of some internal compression would not necessarily be a bad thing.

Bottom Line: The market has been behaving in a positive manner ever since it rallied off the March lows. Of course it is possible that the bullish phase will suddenly fade, but for now I think we are experiencing a bear market rally that could move the S&P 500 up to the area of 1000.

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MAIL

Carl: I've been meaning to comment also on your musings on earnings, but in a different way. Looking at the prior 12 months is pretty useless. In my view, the best in the business, such as Ned Davis, Steve Leuthold, John Hussman and also Robert Shiller (an economist) normalize earnings over either 5 years or 10 years. By these measures today, stocks are pretty cheap, but not necessarily as cheap as in 1974 or 1982. I can show you many instances in the past when earnings were rising sharply and stocks were falling apart, and vice versa, and I'm sure you have seen the same. Fundamentals are important, but they must be used properly (the same as technicals).

 

ANSWER: Thanks for your comments.

I reject any methodology that attempts to prove that stocks are cheap today. These methods may work just fine during a secular bull market, but we are in a severe secular bear market brought on by a global financial crisis that will take years to settle. Technical and fundamental assumptions must be front-loaded with these facts in order to fully assess the risks.

I agree that TMT earnings will be virtually useless until 2008 Q4 earnings drop out of the equation. Not only that, current earnings estimates cannot possibly be right (in my opinion) because of the dark unknowns facing us in the economy.

Carl

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MECHANICAL MODELS

We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.

 

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.