Stock indexes regain part of the ground lost on the sharp sell-off Monday. Not much as really changed since my last post. The trend is down. Momentum had climbed to overbought and has since turned down. The rally of the past week was dramatic in points, but not much enthusiasm was evident by the light volume. It is difficult to anticipate the wild swings occurring from day to day. It sometimes helps to stand back and look the longer term trend along with market breadth. The above chart shows the S&P etf in the upper graph, and the cumulative advance/decline ratio, along with a moving average, in the lower graph. At first glance these two data series seem similar. But on closer inspection you can see divergences between the S&P price and the number of stocks advancing divided by those declining. The yellow line on the price bars shows how prices are climbing higher, yet the same time period on the advance/decline ratio shows a deteriorating situation. An interesting example is where the green line on prices made a double bottom at the same time the advance/decline ratio made a lower low. In this case a high low would have indicated a rally, yet in this case, which could be called a reverse divergence, prices struggled to advance, but then gave way to a sharp decline when the advance/decline ratio failed to better the peak, thus continuing its pattern of lower lows and lower high. A similar situation, although much tighter, occurred where I drew the red lines. I have noticed at many major market bottoms the advance/decline ratio will make a major divergence as prices are making a panic sell-off. In other words, as prices are plummeting to lower and lower lows, at some point the number of issues joining the sell-off starts to diminish, and the advance/decline ratio line forms a high lower. There is no rule that this has to happen. But it seems to in most cases that I’ve studied. These markets are trading in a very unusual manner and perhaps old rules no longer apply. But I will still keep an eye on the advance/decline ratio for clues when this market might be probing for a bottom.
It is well worth reading the December investment outlook by Pimco’s Bill Gross. Here is the link.
I try my best not to get into politics on this blog. I often lose that effort. I was really appalled at the comment made today by Sen. Harry Reid aka Dingy Harry. He made a comment regarding the new Capitol Visitors Center that “we won’t smell the tourists anymore.” Mr. Reid is a real bag of excrement and an embarrassment no matter what side of the aisle you prefer.