As discussed in the July 18 post, the broad market is oversold
and due for a rally even though the basic trend is weak. Analysis
is complicated by the fact of rotation. Risk aversion has grown
since the May 09 - 10 market top. Players have moved out of small
and mid-cap stocks more aggressively than they have with the large
caps, as represented by the SP500. Through Friday 7/21, The SP
Midcap was 12.8% off the May '06 high and the SP Smallcap was down
13.9%. This compares to a 6.4% decline for the SP500.
Going into today, the SP500 is up modestly from its 6/13 low and only
mildly oversold in the short run. The weekly chart shows a deeper
oversold on a 6 - 12 week basis. The broader market is deeply oversold
across both the short and intermediate terms, with the NYSE TRIN at
a high 1.22 for the 60+ trading day span since the May top. This reflects
the compressed strong selling pressure in the small / midcap universe,
especially among the cyclicals, including business technology.
Going forward, the case for a rally reflects the strong oversold condition
of the broad market plus entry into a brief seasonally strong period which
could run out through US Labor Day (9/04). The SP500 could provide
continuing leadership, as the mood of increased risk aversion may not
reverse so quickly.
My primary indicators show a down market. Thus even if a tradable rally
is developing, it is simply unclear whether it would be durable enough
to reverse the downtrend. The work I do with NYSE breadth measures shows
that selling pressure has been trending up since early in the third
quarter of 2005, while buying pressure has naturally been trending down.
Since these volatile trends could extend for another 8 - 10 weeks before
resolving, I intend to be reserved about making market direction calls
beyond the very short term.
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