Weekly Market Digest: 2.26.2010

Welcome to the Weekly Market Digest for the period ending 2-26-2010. Overall, a quiet week as the S&P declined .42% for the period.

Before getting into the charts, I wanted to start with a few general site announcements. Over the last week or so, we have been working hard to enhance the user experience here at Portfolio Tilt. Many aesthetic changes have been made, some content has been relocated while redundant links and modules have been removed.

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Moving on the the equity markets, we will begin our analysis with a look at the general market indices. For the week ending Friday 2-26-2010, the Dow Jones Industrial Average declined .75%, the S&P .42%, and the NASDAQ .25%, overall red across the board.

It still appears that we are in a larger general market correction. Remember that in a strong upward primary trend, a correction does not necessarily coincide with a large price decline. It is possible that prices see choppy, sideways action as light profit taking pauses the advance. It is likely that this is what is occurring right now, as prices have remained below the prior intermediate high for about 7 weeks, but have declined less than 10% . Here are the facts, plain and simple:

Prices are trading above key short-term moving average support (10 week EMA) on all three indices, and these lines are trending to the upside.

Our trend following indicators are all showing a bullish bias at this time.

Momentum however, still shows a slightly bearish disposition, but this is fading and has been for a couple of weeks now as the bulls are regaining strength.

There is nothing on any of these charts to suggest that this primary bull trend is over. This is reinforced by the fact that many stocks continue to breakout to new highs, even as the market averages remain weak. This is something we will discuss further in this update.

 

 

March should be an interesting month because we have a major intermediate term cycle bottoming towards the second half. We expect that we will see a major move around this point, likely to the upside, but one must keep an open mind because inversions can occur, and we may see a top when a bottom was expected. Be patient, wait for the setup, and strike only after a clear turning point has been identified. Keep in mind that prices are currently unchanged from where they were in October 2009.

 

 

We have added and circled (blue) the most recent price low on our Dow Theory chart. It is likely the next significant trough/support area, because we have seen such a sustained advance from the low reached at the end of January. Thus we can become increasingly confident in marking this area as an intermediate bottom, not a short-term low.

 

 

I mentioned earlier in the update that plenty of stocks were hitting fresh 52-week highs, even with the overall weakness in the general market averages. This is another piece of evidence that suggests that we are experiencing a rather mild stock market correction, and not a primary trend reversal. One way to identify these new highs is through the cumulative NYSE New Highs-New Lows Index found on our Market Internals page. This line is calculated as follows; each day we take the number of stocks hitting new 52 week highs, and subtract the number of stocks hitting new 52 week lows, we then add that result to the prior days value.

As of recently the NH-NL index continues to hit new 52-week highs almost daily, even as the indices are consolidating. This illustrates that there are still plenty of opportunities out there to gain alpha right now, and that a good stock picker should be able to substantially outperform the market even during this consolidation.

We can see the benefits of this cumulative index when comparing its movement to equity index prices. For example, in June 2007, we can see that the NH-NL line peaked in advance of the bull market top, and then printed a bearish divergence. This was a sign that although the averages were hitting new highs, the internal health of the underlying trend was weak, and that relatively few stocks were continuing their advance. Prior to this signal, the NH-NL had advanced steadily higher for about 12 months.

 

 

As always, the long term trend. You can also Follow us on Twitter or Facebook, and sign up for our Portfolio Tilt updates by e-mail , delivered every morning.

 

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