MOST STOCKS ARE STILL TRADING BELOW 50- AND 200-DAY MOVING AVERAGES -- A WEAKER VIX INDEX INCREASES ODDS FOR A DECENT DECEMBER -- AUTO BAILOUT HOPES HELP MARKET END HIGHER
% OF NYSE STOCKS ABOVE 50 MA... With all the recent focus on the major market indexes testing their 50-day moving averages, I thought it a good time to look at another indicator that measures the % of NYSE stocks that are trading above their 50-day averages. Chart 1 shows that indicator during 2008. This is a very volatile indicator that swings from overbought readings above 70 to oversold readings below 20. The indicator has bounced from a very oversold reading below 10% during October and November. It has since bounced back to 30% which is a sign of short-term improvement. [That means that 70% of NYSE stocks are still trading below their 50-day lines]. The chart also shows a downtrend line drawn over the May/August peaks. I would think that a rise above that trendline would be necessary to give this indicator a more positive look. Right now, it has the look of a short-term bounce in a longer-term downtrend.
Chart 1
% NYSE STOCKS ABOVE 200 AVERAGE ... A more reliable measure of the market's strength or weakness can be found in the % of NYSE stocks trading above their 200-day averages. That's because 200-day averages are used to measure a market's long-term trend. [A 50-day line measures short- and intermediate- market trends]. Chart 2 shows the indicator since the start of 2006. The sharp drop during the second half of 2007 was one of the bearish signs that warned of a coming bear market. During bull market corrections, the indicator will often pullback into the 40-50% region. The April 2006 bull market correction bounced from 40%. Drops below 40% signal the start of a bear market which occurred during the second half of 2007. Bear market bounces can rise into the 50-60% region. The April/May bounce rose to 53% before turning back down again. The August bounce failed at 40%. A reading above 60% is normally needed to signal a new bull market. Chart 3 shows the trend during 2008 which is still very low 4%. That means that 96% of NYSE stocks are trading below their 200-day lines. While that historically low reading reflects a deeply oversold market, it doesn't show any sign of turning higher. Remember that the stock market is a market of stocks. The market can't be expected to rise much when the overwhelming majority of its stocks are still in major downtrends.
Chart 2
Chart 3
VIX INDEX STILL ON THE DEFENSIVE ... One of the encouraging signs for the stock market is the fact that the CBOE Volatility (VIX) Index remains on the defensive. The daily bars in Chart 4 show the VIX trading below its 50-day moving for the last week. A important level to keep on eye on is its late November low near 50. Any close below that level would signal more VIX weakness which would be positive for stocks. On Wednesday November 26, the day before Thanksgiving, I wrote that the inability of the VIX to reach its October high was a positive sign for the market's short-term trend. The black arrow in Chart 5 shows that's when the recent rally started in the S&P 500. The fact that the VIX has a tendency to weaken during December may be another positive sign for the market. In that Thanksgiving article, I also mentioned that December was traditionally one of the strongest months of the year which gives the market a seasonal tailwind between now and yearend. The Stock Traders Almanac is the source of that seasonal information and explains a lot of yearend terms you'll be hearing about like the Santa Claus rally, the January Effect, and the January Barometer. It's a great source of information.
Chart 4
Chart 5
MARKET ENDS WEEK ON A POSITIVE NOTE... News that the Treasury may use some TARP money to aid U.S. automakers helped turn what could have been a bad day into a pretty good one. Chart 6 shows the S&P 500 closing higher today after trading lower this morning. It's still needs to close above its 50-day average, however, to strengthen its short-term trend. The hourly bars in Chart 7 show the S&P stalled below chart resistance just below 920. The S&P 500 needs to clear that barrier to signal a possible move up toward its November high near 1000. Initial support is visible at last week's lows ranging from 815 to 818. The S&P needs to stay above those levels to keep its short-term uptrend intact.
Chart 6
Chart 7
