Tough Sailing | Stock Market Investing

Sunday, May 25, 2008 | Home | Andy Mayo

Last week gave us an ominous short-term indicator in the S&P 500 -- an outside bar with a greater range -- 67 points, from a high of 1440 to a low of 1373 -- than that of the preceding three weeks.   That means more sellers than buyers and that's not good for prices.  Unfortunately, the long-term indicator -- the slope of the 50-week moving average -- is also negative.

Even the Energy Sector, here represented by the exchanged-traded fund XLE, showed signs of weakness.  Here you can see XLE closed a gap that opened on rising prices, a move that typically signals lower prices to come.


More bad news:  two indicators that correlate with lower prices -- the put/call ratio and the Japanese Yen (FXY).  The put/call ratio has been in a cyclical rising trend since 2004 and appears ready to shift back up, which correlates with lower stock prices.  The Yen's rise does not seem ready to break down yet; again, a rising Yen has not been good for stocks.  Both charts are in Newsletter.

Nervousness about stocks seems to be supporting the defensive sector, Utilities, (exchange-traded fund XLU), despite rising interest rates, usually not considered a good thing for the utility industry.

Pretty much, the only place to be invested remains diversified Emerging Markets.  China, however, appears suspect.

Finally, I pointed out in my commentary on the May 16 close that there were similarities in the NYSE Up/Down Volume with the summer of 2006, when the market recovered and roared ahead for the next seven months.  I also pointed out what was different, and that this time a recovery seemed less likely.  Unfortunately, events now seem to be confirming that view, as Up/Down volume broke below the triangle pattern.  The chart is also in Newsletter.

Given where things stand, it would appear that any weakness in precious metals or commodities would be buy opportunities.  Financial assets do not seem to be gaining strength.

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