It Keeps Going and Going...

May 11, 2009
Mike Doran

The major averages continued their upward trajectory this past week, rallying ahead of and after the release of the bank stress test results and a better than expected employment report.

The major averages continued their upward trajectory this past week, rallying ahead of and after the release of the bank stress test results and a better than expected employment report (-539,000 jobs lost in April). Divergences are appearing as the tech heavy Nasdaq has started underperforming due to the lighter weighting of financial stocks in that index. The S&P was +5.9%, Dow +4.4%, Nasdaq +1.2% and the Russel 2000 came in at +5.1% for the week.

The Financial sector surged 23.0%(!) for the week. Although there were quite a few leaks about the stress tests, the announced ~75 mln in capital requirements was lower than initially feared. The idea that the economy has started to bottom and evidence of "green shoots" in the recent economic data has lured money in from the sidelines. March brought the biggest inflow of funds into mutual fund assets on a percentage basis since April 2003.

Looking ahead this week, we have April Retail Sales that will be released on Wednesday, PPI on Thursday, and CPI, Industrial Production, and Michigan Sentiment on Friday.

Bear Market Rallies

I came across this from the Financial Times this weekend and I thought I'd pass it along. Below are some excerpts.

"The current recovery has propelled the S&P 500 a third above its March low in just 60 days, convincing many sceptics that a new bull market has begun. The Bull Market Express may really be pulling out of the station, but Wall Street’s trains have a nasty tendency to derail just as passengers jostle for seats… …Most recently, the S&P 500 soared 24 per cent over seven weeks ending in early January, only to plunge to a new low… The 2000—2002 bear market had three bear rallies, with average gains of 21 per cent in the Dow Jones Industrials over 45 days.The granddaddy of all bear markets, 1929 —1932, had six false alarms with an average gain of 47 per cent. And Japan’s ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then. …For what it is worth, the US market’s best-informed participants do not find valuations compelling. April saw the lowest level of insider buying (by people associated with the company) ever recorded by research firm TrimTabs with insider selling 14 times as high. Likewise, companies sold 64 per cent more shares than they bought in April."

Technical Outlook

(Click image to view larger)

We are now spitting distance from the January highs (the top of the box) and the markets have had very little pause or consolidation. Overhead we have "round number resistance" at S&P 1000 which is also a near convergence with the 200 day moving average. I wanted to point out one of my favorite indicators is showing an interesting divergence. The "Money Flow indicator" compares the value (price and volume) traded on up-days to value traded on down-days. As you can see on the chart we are making higher highs with lower money flow readings. This is a sign of a slowing of the underling positive volume momentum and higher prices are attracting less demand (buying). The divergence could signal a sell off is imminent or else the divergence could be resolved with an increase in positive money flow in the upcoming days.