The market’s tone has becoming increasingly firmer as of
late. The many technical, internal and seasonal factors we track suggest that a
modest short-term bottom is being formed. While the bottom has not been fully
formed, we are becoming increasingly more comfortable shifting towards a
Bullish position (however briefly that may be). We would be even more
aggressive if several confirming factors showed improvements.
find that the elements are slowly coming together to support at least a modest
year end rally, with a short-term bottom made sometime in early-mid November,
and a projected top in mid-December.
The key positive factors include:
NASDAQ Short interest hit a record
high last week; We have historically seen extremes in shorting (especially by
odd-lotters) occurring fairly close to intermediate bottoms.
NYSE Thrust Sessions: occurs when the NYSE’s decline to
advance ratio is 2:1 or greater, and simultaneously has a similar ratio of
up/down volume. This signal has recently hit levels previously reached in May
of this year, June 2004, and of March 2003 – all high fear junctures that were
near intermediate term bottoms.
Nasdaq 52 Week High Lows: As the nearby chart shows, the
cumulative high low index has reached levels that in the past have been good
buying junctures. Do note, however, that this most recent peak is much less severe
than prior periods that formed better bottoms.
A neutral signal:
NDX MACD Buy Signal: Moves over 75%
often precede positive price gains; As of late, this has been near the 50%
level. This has now formed a higher
peak, ending what is thought of as bearish implications. While this is not yet
bullish, its no longer a negative factor.
A negative signal:
The Advance-Decline Line: Market
breadth has been weak. The last 2 days in October marked the first consecutive
back-to-back days of positive breadth in weeks. Further, Nasdaq’s cumulative
multi-year lows in the A/D line has not been a bullish sign for the techs.
All of the above are internal market indicators. They have
little correlation with the Macro-economic data we track, which has become
We disagree with the Fed: Inflation is Robust, Real Wages are down -2.3% for the
quarter. Total comp costs (also inflation adjusted) are down 1.5%.
Meanwhile, actual Growth — and not the estimated prelim BLS data — is only modest at best.
Thus, our expectations for a rally are modest: a 10% move for
the Nasdaq 100; the SPX runs into difficulties in the 1280-90 area. Dow
Industrials could see 11,400.
Beyond New Year’s Eve we become increasingly