A time for caution

When you can't tell the difference between light at the end of the tunnel and a train coming your way, then it's time to pay attention.

By Jim Van Meerten Jul 10, 2010 11:55AM
JVMI'm not sure if that is light at the end of the tunnel or a train coming from the other way. When things look the darkest we all look for optimistic signs, but let's try not to go overboard. Weed through all the talking heads on TV and the headlines on the financial news and evaluate where the market really stands.

Let's look at my three yardsticks for evaluating the market. I use three because no single yardstick tells the whole picture. Barchart is the source of all my data.

Value Line Index -- contains 1700 stocks so I think it's more representative of the market than the narrower S&P 500 or the very narrow Dow 30 -- Index closed up for the week but still no long term trend
  • Index gained 5.43% last week
  • Index gained 2.05% last month
  • Index was up for 3 of the last 5 weeks
  • Still rated as a Barchart 40% technical sell
  • Friday closed at 2253.61 and approaching its 20 day moving ave age of 2324.87

Barchart Market Momentum -- Contains approximately 6000 stocks -- The percentage of stocks closing above their Daily Moving Averages for various time periods -- Above 50% is always good --One bright note among many sour notes

  • Friday 52.63% closed above their 20 DMA, only 43.18% closed above their 50 DMA, only 38.28% closed above their 100 DMA
  • Last week only 24.97% closed above their 20 DMA, only 23.59% closed above their 50 DMA, only 28.36% closed above their 100 DMA
  • Last month only 43.05% closed above their 20 DMA, only 24.10% closed above their 50 DMA and only 38/.22% closed above their 100 DMA

Ratio of stocks hitting new highs/new lows for various time frames -- 1.0+ bullish, 1.0 neutral, below .99 bearish -- We've got some strong bullish signs here

  • Ratio of stocks hitting 1 month new highs/new lows -- 754/219 = 3.44
  • Ratio of stocks hitting 3 month new highs/new lows -- 288/152 = 1.89
  • Ratio of stocks hitting 6 month new highs/new lows -- 238/116 = 2.05

Summary and Investment Strategy -- Something is beginning to happen. Whether it's the light at the end of the tunnel or the train coming our way I'm not sure. You can run these yardsticks at the end of each day yourself and be able to get a market pulse.

 

The best sign is that more stocks are hitting new highs than new lows so the market is off its bottom range. Since only 52.63% of the stocks are trading above their 20 DMA but not their 50 and 100 DMA, the trend is very short. I will continue to trim stocks that trade lower and add a stock only if it meets my strictest criteria. Daily caution should be your standard operating procedure for this week.

 

Jim Van Meerten is an investor who writes on investing here and on Barchart Portfolio Blogs. Please leave a comment below or email JimVanMeerten@gmail.com.

 

Disclosure: No positions in the stock mentioned at the time of publication

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