Visually Compelling TA

Louis Navellier recently wrote about the market's three latest lows on October 10, November 20, and March 9 (The Market Makes a Three-Point Landing). He then aptly compared these to three market lows of July 2002 - March 2003 which were followed by a sizable market rebound. Navellier builds on this observation with other similarities between 2003 and 2009 positing a similar rally can be expected at this time. He is not alone (Murphy, Lansing) in anticipating near-term rally but I observe two things different between then and now.

First, examine duration and momentum. The three earlier lows occurred over a period of eight months while the current three lows occurred over only five months. Further the bearish momentum preceding the current low was twice that of the earlier low. (The 700-point bear move preceding the current lows occurred over 12 months while the same size drop preceding the July 2002's low took place over a much longer 24 month.) Given the severity of the market's recent drop, I contend the market will take a longer time to reestablish a foundation before a new bull market ensues.

The second difference pertains to the strength of the index internals. As of March 2003, about two-thirds (342) of the S&P 500 constituent stocks were above their July 2002 price (the time of the first low). As of this past Friday, only about one-third (168) S&P 500 stocks were above their October 10 lows. Only one stock is trading at more than 100% and only 18 are trading at more than 50% of their October value. By contrast in March 2003, ten were above 100% and 40 were above 50% of their July 2002 prices. This is not the internal strength from which enduring broad-based rallies are launched.

The resolution of the current basing period will likely require a few more months of strengthening internals. As the market churns in the 800-850 range during the next few months, profitable companies will attract buyers while weaker stocks will fall further. But once a critical mass of buying interest is evident in 2/3 of the stocks rather than merely 1/3 of the stocks, we can expect a renewed bull market.

Comments: View Comments |  Sunday March 29, 2009