MARKET REMAINS STALLED -- ADX LINE HAS TURNED DOWN -- LOW VIX IS IN DANGEROUS TERRITORY

LEADERSHIP LOSES MOMENTUM... Upside momentum in the leading market indexes continues to weaken. To demonstrate that, we're applying the Average Directional Index (or the ADX line) to the chart of the Nasdaq 100. The ADX line measures the strength of the existing trend. A rising ADX, therefore, is a good sign for a rising market. [See black line along bottom of Chart 1]. The ADX line turned up at the start of the March when the current market rally began. There were a couple of minor downturns as the NDX corrected over the next three months. Since mid-June, however, the ADX line has broken its uptrend and has fallen back below 20. That downturn suggests to us that the trend that started in March has run its course for now, and the best we can hope for is a continuing choppy market. Given the fact that most of our short-term indicators are negative, that also suggests to us that the Nasdaq market is still vulnerable to more profit-taking.

Chart 1

MINOR DISTRIBUTION IS IN PLACE... One of the ways we can tell if the market is undergoing some distribution (selling) is to track the volume bars. Chart 2 plots the volume for the NYSE Composite Index for the past month. The bars are color coded for easier comparison. The green bars represent up days and the red bars down days. If you look over the past two weeks, you can see that the red bars have been larger than the green bars. That's not a lot to go on, but it does suggest that there's been more selling than buying. That fits with our view that the market looks very tired here and professionals are taking some money off the table. We suggested doing that earlier in the month when we pointed out that July was usually a good time to take some profits. We haven't changed that view.

Chart 2

VIX IS STILL DOWN... A VIX reading in the low 20s is a danger sign for the market because it reflects too much complacency. As we've said before, however, the VIX has to start rising in order to give us a serious sell signal. We normally look for a rise over 25 to signal a serious market downturn. That hasn't happened yet. But it is in dangerous territory and may partially explain the stalling in the market uptrend.

Chart 3