As I do at the end of each month, below is a list of things I
look at when considering the health of the market:
Positive -
Breadth – Overall, breadth has been fairly good. New
highs have swamped new lows. While the number of new highs peaked on November
15th, we also had more new lows in mid-November than we did any day this week –
even with the big selloff Monday. The advance/decline line has been moving
higher. Overall, I would say breadth is slightly positive.
Foreign Markets – Overseas markets have done quite well
lately. There are several markets that are at or near new highs, including
Italy, Sweden, Spain, Mexico, Malaysia, and Singapore. Plurality among markets
can be confirming. If the above markets begin to falter, that could signal
trouble for the U.S. So far, so good.
My expanding watch list – I am still seeing a good
number of stocks that are setting up in new basing formations. This is important
because without new breakouts and leadership emerging rallies will have a
difficult time sustaining themselves. At this point, this is a positive.
UUWNHI (Unofficial, Unscientific, Working/Not Working Hanna
Indicator) – When I look at the action of leading stocks, the performance of
breakouts, and what has occurred during pullbacks, it has all been quite
favorable. There is some definite leadership and there has been some excitement
evident among high-flyers – see the exchanges for example (NMX, NYC, IAAC, ICE).
This kind of activity is a positive. People become more willing to aggressively
buy and push stocks higher if there are examples of companies that are rewarding
investors for jumping on momentum. While this type of activity can end abruptly,
it is positive while it lasts.
Neutral –
Accumulation/Distribution – Aside from Monday’s drop,
there has been very little distribution evident in the market as of late. There
hasn’t been a whole lot of high-volume buying lately, either, though. Therefore
I’m viewing price and volume action as neutral.
Negative –
Sentiment – Most intermediate-term sentiment indicators
I watch are overly bullish at this point. This typically indicates too much
froth by investors. While sentiment indicators are an inexact timing tool, they
hint that the upside may be limited and risk to the downside may be increasing.
I’m considering sentiment a negative.
Summary –
Many of the indicators I look at remain positive. Still, I’m
not terribly excited about the prospects going forward. The momentum of the
market has slowed decidedly, and I’ve discussed many times over the last few
weeks that I believe the market has moved from trending to oscillating. That
doesn’t prevent us from making higher highs from here, but it does mean than new
highs are more likely to be met with selling than new buying. We got a taste of
that this Monday as the market fell harder than it has since the rally began. I
believe a topping process has already begun. Money can still be made on the long
side, and as long as all the positives I listed above remain positive, then the
long side should remain in focus. Just make sure you’re near a chair when the
music stops. Markets tend to top within 2-4 months of when momentum tops.
Momentum topped at the end of October. Remain watchful.
Best of luck with your trading,
Rob
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.
