200-DAY MOVING AVERAGES HOLD -- WEEKLY INDICATORS, HOWEVER, REMAIN NEGATIVE -- A LONGER LOOK AT WHY NEW DOW LEADERSHIP ISN'T GOOD FOR THE MARKET

SO FAR SO GOOD... Global stock markets survived an important test this week. Almost everywhere we look in the world, we see major stock markets staying above or bouncing off their 200-day moving averages. The first three charts show some of the foreign markets doing the latter. Emerging markets in Latin America had been among the hardest hit during the month of May. Chart 1, however, shows the Latin America iShares (ILF) bouncing off their 200-day moving average and ending the week on a positive note. Chart 2 shows the Toronto Composite Index doing the same. The European Top 100 Index (Chart 3), which is representative of European market action, ended the week on top of its 200-day line as well. In contrast to the pessimistic mood at the start of the week, global markets ended the week on a more optimistic note. U.S. markets show the same pattern.

Chart 1

Chart 2

Chart 3

U.S. INDEXES BOUNCE OFF 200-DAY LINES ... A quick glance through our charts reveals a large number of stock indexes that bounced off their 200-day lines this week. The list includes brokers (XBD), Drugs (DRG), Reits (RMX), and Oil (XOI). Three of those are shown in the following charts. A brokerage upgrade gave a boost to brokerage stocks on Friday (Chart 4). Reits ended the week above their 200-day line (Chart 5). Chart 6 shows the Oil Index also bouncing off the long-term support line. On Wednesday, I showed the S&P 600 Small Cap Index bouncing off its 200-day line (Chart 7). The S&P 400 MidCap Index did the same. As did the S&P 500 Large Cap Index. The question now is whether they'll be able to reclaim their 50-day lines.

Chart 4

Chart 5

Chart 6

Chart 7

WEEKLY CHART IS STILL A PROBLEM... The daily bars in Chart 8 show the week's positive price action in the S&P 500. This is the same chart I showed last Friday (May 19) when I wrote that the S&P 500 was testing its 200-day moving average, looked oversold, and was entitled to a bounce. I also suggested that the first resistance barrier to be tested was the mid-April low at 1280. If that's exceeded, I'd expect more serious resistance in the 1290-1298 region. The higher number would retrace two-thirds of the May decline and would represent a test of the 50-day average. The reason I remain skeptical about the staying power of the current rebound is the appearance of the weekly indicators (Chart 9). Although no damage has been done to the price uptrend, weekly indicators remain negative. That's true of the weekly MACD and stochastic lines. Neither one showed any improvement this week. At market bottoms, the weekly stochastic lines (on top of Chart 9) usually fall closer to the 20 level (as they did last October). The fact that the stochastic lines are so far from that level suggests that the market has more work to do on the downside. Chart 9 shows the S&P bouncing off the lower Bollinger Band. It now has to clear the 20-week average (red line) at 1289 to turn its intermediate trend back up again. I'm doubtful that it will do that.

Chart 8

Chart 9

A LONGER-TERM VIEW OF DOW PERFORMANCE ... I wrote an article on Wednesday about how new leadership by the Dow Industrials was a sign of a more defensive market. My last chart today shows why I believe that to be the case. The reddish line is a ratio of the Dow Industrials divided by the S&P 500 since 1998. The green line is the S&P 500. During the latter part of the 1990's the ratio was falling as the market rose. That's usually the case in an uptrend. The Dow/S&P ratio bottomed, however, during 2000 as the market peaked and money flowed to the relative stability of the big Dow stocks (first red circle). The Dow continued to outperform the S&P until the second half of 2002 just in time for the market to bottom. The ratio started to fall in early 2003 as the S&P began a three-year bull run (green circle). To the bottom right, you can the ratio starting to rise again (second red circle). [On Wednesday, I showed the Dow/S&P ratio breaking a two-year down trendline]. The chart shows that Dow underperformance is usually a sign of an optimistic market; and why I believe that the new Dow outperformance is a sign of a more defensive market.

Chart 10