CCM Short Takes
Intermediate-Term Bias Remains Bullish
Sentiment Is A Little Extended - 1,163 to 1,168 Within Reach

03/11/2010: Monthly chart shown below; on a weekly chart, potential resistance comes in at 1,163, 1,168, 1,176, 1,190, 1,200, 1,219, 1,223, and 1,229; all remain possible at some point in 2010.

The market’s intermediate-term bias remains bullish. Investor Sentiment, a contrary indicator, is leaning bullish, which may limit gains from current levels and is a little concerning at the moment. Market internals remain healthy – a good sign for the longer-term. A pullback toward 1,130 or 1,115 would be healthy.

03/09/2010 – Clients: We recently updated both our current market and historical cycle models, which enable us to compare 190 markets, sectors, and asset classes head-to-head. The results favor the following:

• Materials and Energy
  
• Select Developed Markets
  
• Select Emerging Markets
  
• Commercial Real Estate
  
• Transportation
  
• Small Cap and Mid Cap
  
• Consumer Discretionary
  
• Technology
  

The composite rankings can help us make better allocation decisions in the coming months.

03/05/2010: As of 2:40 pm ET, it appears as if we are going to get a close above 1,125 on the S&P 500. That move, along with recent strong market internals, increases the odds that stocks will attempt to make new highs within the context of a rising trend. We can expect some backing and filling in any market; so some weakness next week would not be a big surprise. However, the market’s overall tone has improved quite a bit since Monday of this week. Given the market’s improved risk/reward profile, we may begin to redeploy some cash over the next few trading days.

03/04/2010: The chart below was posted in Short Takes on 02/26/2010. It is presented again as of 02/26/2004.

Below is an updated version of the chart. Notice how the S&P 500 has stalled at a logical resistance point. Until we get some resolution in this area, it is best to remain patient.

On balance volume (OBV) is easy to calculate; when a market closes up for the day, that day’s volume is added to a running total of volume; when a market closes down for the day, that day’s volume is subtracted from a running total. A rising OBV line is positive; a falling OBV line is negative. Divergences between price and OBV give us the most useful information. When a market makes a new high, we would like to see OBV make a new high. OBV is more of a warning light for weak markets rather than an all clear signal for strong markets. OBV flashed warning signals at a similar point in the economic and market cycles in 2004 (first chart below). So far in 2010, OBV is not flashing warning signals; in fact it has already matched its recent high ahead of price, which is positive (second chart below). If OBV were a temperature gauge in your car, it would be within the normal operating range in 2010. In 2004, it would have turned yellow or red. It does not mean the car cannot overheat later in 2010, but for now the car is running within healthy operating parameters.

03/03/2010: Many markets still face a test of overhead resistance; the short-term outlook remains mixed as long as resistance is still in play. The analysis below relates to the intermediate-term. A close on the S&P 500 above 1,125 would be a good next step to help confirm current market internals. If the odds favored a lower low (below 1,044 in the S&P 500) rather than a higher high (above 1,150), we would expect to see weak market internals off the February 2010 lows. That is not what we have seen; market internals (breadth and confirmations) have been quite positive in recent days and weeks. In 2004, the market peaked in early Q2 and then made a series of lower lows over several months. Based on recent strength in market internals, another push toward the January 2010 highs is much more probable than it was off the first correction low in 2004.

How to read the chart below - Compare A-1 to A-2, B-1 to B-2, C-1 to C-2, etc:

• Points A-1 and A-2: In healthy markets we see broad participation of stocks, sectors, indexes, and regions of the globe when new highs are made. When the S&P 500 made a new high in early March 2004, the Dow failed to make a new high (see A-2). In 2010, the Dow did confirm the S&P 500’s most recent highest high (see A-1), which is bullish in terms of the possibility of revisiting those levels or making a higher high later in the year.

• Points B-1 and B-2: Same concept as above; the Transportation Index (TRANS) failed to confirm the highs in 2004 (see B-2). In 2010, we have a strong TRANS both near the recent highs and off the recent lows (B-1).

• Points C-1 and C-2: $NYSI is the Summation Index which measures the market breadth (number of stocks participating in gains). In 2004, $NYSI was weak before March highs in the S&P 500, which is indicative of a weak market (see C-2). Look how much stronger $NYSI looked heading into the January 2010 highs (see C-1).

• Continued below chart...

• Points G-1 and G-2: Off the first correction lows in 2004, the subsequent rally in the S&P 500 occurred on weak market breadth (see G-2). Notice how much healthier market breadth has been off the February 2010 lows (see G-1). What has been impressive in recent days is (a) how long $NYSI has held up, (b) the continued steep slope of $NYSI, and (c) recent improvements in chart patterns.

• Points D-1 and D-1: $NYMO is similar to $NYSI, but it measures market breadth on a shorter-term time horizon. Going into the 2004 highs, $NYMO was weak (see to the left of D-2). In 2010, $NYMO looks stronger both before the January 2010 highs, and more importantly off the February 2010 lows (see D-1 and green box to the right of D-1).

• Points F-1, F-2, H-1, and H-2: $NYHL is also a breadth indicator measuring the difference between new highs and new lows. Strong markets see a lot of stocks making new highs; weak markets see numerous stocks making new lows. $NYHL was weakening going into the March 2004 highs (see F-2 and to the left of F-2). The move off the first correction low in 2004 saw an initial thrust in $NYHL, but it quickly dissipated (see H-2). $NYSI was much healthier in 2010 heading into the January highs (see F-1). What has been impressive in recent days is the sustainability of the move off the February 2010 lows in $NYHL (see H-1).

Could market internals weaken? Sure, but until they do we will continue to give the bull market the benefit of the doubt. We still have some concerning overhead resistance nearby in several markets; so we need to keep a close eye on all these indicators. As stated above, a close on the S&P 500 above 1,125 would be a good next step since current resistance may be a tough barrier to crack.

03/02/2010:

The market's reaction near 1,122 - 1,125 on the S&P 500 may help us better understand the odds of (a) seeing higher highs, or (b) more corrective activity. First chart (above) from the close; second chart posted at 12:30 pm ET.

03/02/2010 - Before The Open: In addition to yesterday's positive market breadth and intermediate higher-high in the S&P 500 (see 03/02/2010 entry), some favorable developments came from consumer staples. During corrections and bear markets the relative strength of consumer staples, health care, and utility stocks tend to be strong (relative to the S&P 500 Index). With Monday’s broad gains in stocks, the relative strength of the consumer staples sector broke its rising trendline, which allowed it to join health care and utilities. Yesterday’s break by consumer staples sends bullish signals for retail, consumer discretionary, small caps, mid-caps, technology, higher-yielding fixed income, commodities, commodity stocks, and commodity related nations. If we add yesterday's action to still contained interest rates, favorable monetary policy, and sentiment measures that have backed off extreme (and bearish) readings, we may still have conditions that are favorable to economic recovery assets.

03/01/2010 - After The Close: The S&P 500 has now made three intermediate higher-highs (green arrows below) and two higher lows (blue arrows below), which looks like an uptrend rather than corrective action. The upward-sloping green trendlines appear to again be bounding prices, which improves the odds of additional upside in the coming days and weeks. It simply means the big picture looks better after Monday’s close then it did in the middle of last week.

03/01/2010 - Before The Open: With the Fed needing positive asset inflation to help impaired balance sheets, gold remains a good way to monitor the health of the risk trade. Gold is trying to make a stand near current levels and there are some reasons to be optimistic, but it has not yet made a convincing move higher relative to the pink trend lines shown below. Recent dollar strength vs. a weak Euro and a weak Pound are related to concerns about deficits and debt, which could harm asset prices.

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Chris Ciovacco
Ciovacco Capital Management