As you can see from the chart above, after today’s sharp drop, new 20-day lows across the NYSE, NASDAQ, and ASE are now outpacing new highs rather handily. On Monday, the new lows hit a level they haven’t seen since the March bottoming period. I notice that new 65-day highs and lows are now about even. This fits with the pattern of market weakness–and the trend shift–noted in the recent indicator review and update of the sectors. Seeing the market weakness setting up early in the morning, as noted in the intraday Twitter comments, and placing that weakness in the context of a trend shift was helpful in anticipating our break of last week’s lows. It’s a nice example of how placing short-term strength/weakness in the context of longer-term market activity is useful in anticipating moves to and through key price levels.
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Last week’s indicator review found that “As long as new lows exceed new highs, we have to look at this as a potential trend shift that could take us well into May’s trading range.” We did, indeed, see those new 20-day lows continue to outpace new highs, taking us briefly below 900 in the S&P 500 Index before bouncing higher late in the week.

The bullish momentum that we saw sustained from the March lows (top chart) has been lost, a situation that commonly occurs during topping processes. New 65-day highs, which peaked early in June, have steadily declined since then and now stand barely higher than new lows (middle chart). Meanwhile, the advance-decline line specific to S&P 500 stocks–a great feature from the Decision Point service–actually broke May lows last week before bouncing.

With a majority of S&P 500 sectors retreating from their bullish trending status, we now stand in a broad trading range between May’s lows and June’s highs. At this juncture, given the relative strength of NYSE Cumulative TICK and intermediate-term new highs/lows, I see this more as a correction within a bull market move than as the start of a fresh bear market. A move below May lows, particularly accompanied by new 65-day lows exceeding new highs, would lead me to re-evaluate that stance.

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Last week’s indicator review concluded that “Friday’s price highs in the major indexes were not confirmed by fresh highs in the 65-day high/low measure, an indication that the rally may be in for a period of consolidation. As long as we stay above the May highs in the S&P 500 Index, however, one has to respect the sustained buying displayed by this market.” During the subsequent week, we did indeed see range trade and consolidation, followed by Monday’s weakness. That weakness took us below May’s highs, raising the possibility that much of the June strength was a head to May’s shoulder.

Even before Monday’s decline, we saw a drop in trend strength among the S&P 500 sectors, as well as poor relative performance from three key sectors. Although Friday closed at a bull market high, we saw non-confirmations from the number of stocks making fresh 65-day highs vs. lows (middle chart) as well as reduced upside momentum (top chart). While the advance-decline line for NYSE common stocks did register a fresh bull peak early in June, it did not for the S&P 600 small caps (bottom chart, much credit to Decision Point). This once again highlights the distribution occurring at the June highs.

So where do we go from here? On Monday we registered 391 new 20-day highs among NYSE, NASDAQ, and ASE stocks, against 768 new lows. As long as new lows exceed new highs, we have to look at this as a potential trend shift that could take us well into May’s trading range. The key is holding below those May trading highs: if June’s trade amounts to a false breakout, we should stay within May’s range and trap the June bulls. A move back into June’s prior range and above May’s highs would set up a fresh set of range bound conditions.

As always, I will be following the indicators each day before the market open so that readers can gauge market strength and weakness. Those indicators are posted via Twitter; subscription via RSS is free, or you can check out the five most recent tweets on the blog page.
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Two of the sectors that failed to make highs along with the major indexes in June are now trading below their May highs: banks ($BKX, top chart) and homebuilders (XHB, bottom chart). It is difficult to imagine a sustained, vigorous bull market when the financial system and housing are not inspiring investor confidence.
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One of the areas I’ve spent a fair amount of time on is news-related sentiment.  How stocks react to overtly positive or negative news, and what impact that tends to have on the broader market, is a consistent source of good information.

The new blog Sentiment News by the good folks at RavenPack (don’t ask what it costs, it’s not priced for individuals) highlights a study by Macquarie Research highlighting stock performance surrounding positive and negative news.

Some highlights:

• Investors are more likely to react adversely to negative news sentiment than to react favorably to positive news sentiment.
• Negative news sentiment is a stronger leading indicator of future underperformance than positive sentiment is for future outperformance.
• Stocks tend to be underperforming prior to a negative news announcement.
• Stocks tend to rebound after about five days {after negative news}.
• There is no short-term reversal after positive news events.

All of these confirm what I’ve found as well, so they are useful rules of thumb if trading individual stocks or even sectors that are greatly impacted by bellwether stocks.

Source:

How Does The Market React To News?

News Sentiment, June 17, 2009