The recent weakness in the market has brought it into a
deep short term oversold condition at about 4.5% below
the 25 day m/a. Oversolds at this level have proven very
attractive to aggressive traders in recent years. In turn,
my six week selling pressure gauge is heading into oversold
territory which is another positive.
Intermediate and longer run measures have turned negative.
Breaks of trend on market and breadth measures, weakening
momentum against the 40 wk m/a and a downturn in the 14 wk.
stochastic all signal caution. There have been no breaks
in any of these measures so decisive that a whipsaw move
in the market to the upside can be readily precluded.
Speaking more broadly, the volatility in the market since
mid-July suggests that players are re-appraising fundamentals
that guided the market sharply higher from mid-2006. Signs
of a slower economy, earnings estimate cuts and re-ignition
of inflation pressure have forced the re-appraisal.
The suggestion to me is that any forthcoming rally may be
more subdued and of shorter duration than we have seen in
recent months.
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