In my first article for Financial Sense on 9-2-03, I commented about the high momentum readings the rally had generated by saying:Posted on 10/07/2003 4:48:28 PM PDT by lelio
"Crossroads"
In my first article for Financial Sense on 9-2-03, I commented about the high momentum readings the rally had generated by saying:
"...Next I would like to discuss two other indicators that allow us to take a rather comprehensive look under the surface. The first one is a momentum indicator designed to measure the collective momentum of the components that make up a market index. The problem with capitalization weighted indexes is that, just a handful of stocks can influence--in a rather disproportional way--the performance of the index they are a part of, which in turn distorts the true technical picture. This indicator uses the mean value of the daily momentum readings for every one of the 100 stocks that make up the NDX. Therefore, it is truly inclusive of all the stocks that make up this index and it allows us to see whether the strength/weakness of the index is accurately reflecting the strength/weakness of its individual components, as it should.
Notice that the latest rally in the NDX produced the highest reading since last October. This is significant and that is why I am bringing it to your attention. It means that not only a very large number of stocks are participating in the move, but also that most stocks have enjoyed substantial gains. It is a sign of a very strong market. This type of reading is usually associated with the start of intermediate advances. In most cases, it ought to be interpreted as bullish until proven otherwise. In some occasions, this type of action can be indicative that a rally has entered a terminal phase. It may mean that with only handful of quality stocks that can be found in the NDX already in the stratosphere, investors are buying anything they can get their hands on and they are willing to pay any price. If volume hadn't been as pathetic as it has been during this latest leg up, I would be inclined to believe that this momentum reading is a sign of a strong and healthy market. However, given how low the volume has been, it could very well be indicative of a rally in its terminal phase."
So, given the action of the last five weeks, is the rally that we had so far only the "first leg" of another intermediate term advance or the terminal phase of the rally that started in March?
Let's take another look at our momentum indicators and also our Inflows/Outflows comparison charts.
We can see that aggregate momentum totally collapsed between the high recorded on 9/8/03 (point A) and the high recorded on 10/6/03 (point B). Such a wide divergence highly suggests that the upside potential is rather limited and, if that is the case, then the advance from the August 6th lows was indeed the terminal phase of the rally that started in March, instead of being the "first leg" of a new intermediate term advance.
However, to make such a determination, we need one other event to take place, which as of 10-7-03 has yet to happen.
First we need to see a reversal of money flows. As it stands right now, inflows exceed outflows by a wide margin, both in NYSE and in NASDAQ stocks.
Notice how wide the gap is between inflows/outflows for NASDAQ stocks, which clearly illustrates investors' robust appetite for risk. The combination of a collapse in aggregate momentum and positive inflows means that on one hand, the market is not in a dangerous position as long as an exogenous event doesn't upset the current dynamics, but on the other hand, because it lacks depth and substance, it is not in a position to successfully withstand an outside shock.
Where might a shock come from? In my view, it can come in the form of a lower dollar and higher oil prices.
Investors seem convinced that the 92 level in the cash dollar index will hold, yet the chart argues otherwise. At the same time, the chart for oil argues that a re-test of the $32.5 level is only a few trading days away. Is the market prepared to deal simultaneously with oil prices above $32.5 and a dollar index below 92? I takes a real leap of faith to answer such a question in a positive manner.
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Copyright © 2003 All rights reserved. Ike Iossif |
I think you've got it! I'd be careful short or long because there is risk in both directions.
Way kewl. Would it be able to distinguish legitimate question marks somehow?
Otherwise, looks great (less filling). I think we can outsource arete's job to you.
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