As I do at the end of
each month, below is a breakdown of several of the measures of market health
that I look at…
Positives –
Foreign Markets – Foreign markets have been on a tear. This includes both
developed and emerging markets. Exceptional strength has been seen in areas like
Japan, Canada, Brazil and China. The move higher in world markets helps to
validate the recent move in the U.S.
My expanding watch list – Over the last several weeks, the number of stocks
making it through my scans has increased steadily. With more and more stocks
continuing to set up in basing formations, there should be plenty of opportunity
to profit should the market continue to advance.
New Highs vs. New Lows – Breadth has been strong as new highs has swamped new
lows recently. Unlike the October/November move which was confined to select big
caps, the rally in January has been much broader. The strong performance of the
small and mid cap groups is a result of this.
UUWNHI (Unofficial, Unscientific, Working / Not working Hanna Indicator) – The
UUWNHI regularly gives me the best “feel” for what is going on the markets. The
biggest positive in the market recently has been the action of breakouts. I have
not seen such strong follow-through in stocks breaking out of basing formations
since at least the 4th quarter of 2004. There seem to be as many breakouts
succeeding as are failing – and that is rare. Pullbacks have also provided nice
opportunities for entry as selloffs have been brief and bounces strong.
Interestingly, there has also been opportunities on the short side of the
market. Rather than a raging bull which lifts all stocks, the market remains
split to some degree. It has been a good trading environment, and traders have
been rewarded for taking risks.
Neutral -
Accumulation / Distribution – Price and volume action has been sketchy, with
multiple days of both institutional accumulation and distribution evident in the
last few weeks. Institutions seem unsure, as volume has been on the rise during
both up and down days. While this makes it difficult to gauge institutional
conviction, it has served to increase volatility in the market. After the last
two years of sideways action, a little more volatility would be welcomed by most
traders.
Sentiment – Even with the strong performance
of the market this month, most measures of sentiment have not become excessively
bullish. The rally has been accompanied by some doubt. Still, bearishness is not
high, either, so I am viewing sentiment as pretty much a non-factor at this
point.
Conclusion
While most of the measures of market health I look at are positive right now, I
would still recommend extra caution. The economy is showing signs of slowing and
corporate profits have been a bit disappointing so far this quarter. The fed
meeting tomorrow could be a big market mover, helping to create a new leg up or
a double –top and selloff over the days and weeks to come. Additionally, as I’ve
pointed out in recent columns, it has been a long time since the market
underwent a correction of any magnitude. The longer we go without one, the
higher the risks. At this point, though, taking those risks is being rewarded.
Therefore, continue to take the trades as they come to you but be vigilant about
your stops and trade management.
Best of luck with your trading,
Rob Hanna
RobHanna@comcast.net
