This is one of those rallies that frustrates lots of traders.
Why? Because they spend so much time doubting it, or shorting it,
that buyers can pick and choose their longs and slowly move the
market higher.
The pace of the advance since the August 3rd jobs report surge has
been tame, just like the sleepy summer volume. But, soon, as I've
been warning, the bears will have to capitulate. They haven't yet
because the pain has been small.
Below are four charts which explain some of what is going on. Yes,
it is a market of stocks. But I look at the indexes for clues about
strength and breadth because even the mighty Apple can't move
higher if the S&P is in a bear trend.
First up is the benchmark index itself. I've drawn lines of
interest that signify levels which have been important this year.
1360 and 1390 have been both support and resistance.
Now they are back to being strong support.
The top line is drawn from the May 1st highs as Friday's price
action finally pierces 1415.
Next is an "internal" look at the index using an important breadth
indicator, the Bullish Percent Index. This indicator comes from
adding up the number of stocks in the S&P that are on Point
& Figure buy signals. The higher the percentage, the better.
As you can see from the histogram style view I've chosen, this is
the stuff that bull runs are made of. Sure, the S&P is
vulnerable to a pullback. But that would be extremely
constructive... if we get it.
And the BPI will keep crawling higher toward 80% as more of the
index joins the bull party. Sustained new highs are associated with
the BPI staying above 80%.
What about the Transports?!
Now, let's look at an index still of concern. Some of the weaker
indexes I pay attention to like the Russell 2000, the NYSE
Composite, and the S&P Equal Weight have all been looking
better this month, indicating more solid breadth.
But the one of concern is the Dow Jones Transportation Average. If
you know anything about Dow Theory, you know that proponents want
to see the Trannies confirm any move in the Dow Industrial Average.
This has not been the case as the DJTA has made lower highs and
even suffered a bearish cross of its 50 and 200-day moving
averages. Even though the Trannies have 3 or 4 lower highs to
overcome, while the Industrials are right near their closing high
for this bull market around 13,275, the situation is improving and
will be watched closely.
Keep in mind that when FedEx lowered guidance and talked about
their call for 1% GDP growth in the second half, a lot of pain was
already getting priced-in to transportation names. While I think
the recession probability is slowly moving away from 40% to more
like 20%, it would be nice to see these cyclically sensitive stocks
confirm that.
Strong Stocks Lead the Way
Finally, I offer a chart of market breadth you will find in only
one place. It comes from the technical work of a wise old market
veteran by the name of Marty Chenard who runs a daily service at
StockTiming.com. He occasionally provides some of his proprietary
analysis for free on the site. Since this indicator is unique and
somewhat abstract, I quote him directly for its description.
"The chart presented below is an example of a simple count on the
S&P. In this chart, we assign fairly High and Low Relative
Strength numbers that we use for scanning the actual daily counts
at the end of each trading day. We then plot the counts so our
subscribers can see what is happening to the best and strongest
stocks (as well as the worse and weakest)."
Again, from Mr. Chenard...
"How to read the chart: When one group outnumber's the action of
the other group, that particular group is in control. (In other
words ... If the red line is higher, then the Bears have the upper
hand. If the green line is higher, then the Bulls have the upper
hand.)
Today (Friday, August 17): Focus on the two green arrows we
inserted on the chart. The bottom arrow starts on July 24th, where
the green line (Very Strong stock count) made a low. After that,
the counts proceeded to make higher/highs and higher/lows (see both
arrows).
Higher/highs and higher/lows? That is the definition of up trending
action on the Very Strong stocks found on the S&P 500. That
indicated that the Bulls were continuing to gain ground since July
24th, which also meant there was a positive bias developing in the
market."
Conclusion: You can wait until after Labor Day for volume to come
back into the market. Or maybe Jackson Hole will provide some
conviction about direction. Or maybe the German court ruling in
mid-September on lending money to Spain and Italy will bring
volatility back.
But the market won't wait to go higher. It's just beginning to pick
up steam now.
The question is, if you wait for a dip to buy will you recognize it
as an opportunity when it comes?
Kevin Cook is a Senior Stock Strategist with
Zacks.com
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