Market Needs To Show Volume And Breadth To Signal Next Move.

Market Needs to Show Volume and Breadth To Signal Next Move.

The stock market is gyrating in summer doldrums without much external movement.  Breadth has been poor on both the upside and downside.  Stocks will need to breakout or breakdown out of their recent range on strong volume and breadth to signal the next intermediate-term move.  Our suspicion remains that the longer-term trend remains down, and we continue to advocate high T-bill cash and alternative asset-class positions.

 
Chart 1:  Stocks in range and needs to find breadth and volume in some direction to signal move.  Crtsy Bloomberg

One of our favorite indicators of breadth is a tool we first learned about from Marty Zweig, which has been well researched by an award-winning paper by Lowry's.  It measures the percentage of up + down volume that is up-volume, and the percentage of advances + declines that are advances and averages the two numbers.  When this indicator rises above 90% it means 90%+ of up + down volume is up-volume and 90%+ of advances + declines are advances - a signal of a very strong breadth day.   Conversely when this indicator falls below 10% it means that 90%+ of up + down volume is down volume and 90%+ of advances + declines are declines.  It is very rare for a catchable bear market rally not to be signaled by a 90% up-day, and even more rare for a true bull market bottom to emerge without one or more 90% up-day's early in its development.  The March-May bear market rally was signaled nicely by a 90% up-day in its first few days off the bottom, and a 90% down-day signaling the end of the rally within a few days of the May peak.  The current rally off of the July lows has failed to produce even one 90% up-day.   We came close to a 90% down-day last week, but didn't quite get there.  The combination of low and declining volume and not very strong breadth plurality in either direction, means the market has not exhibited much of  a directional bias since June.  This dovetails with our Top RS/EPS New Highs and Bottom RS/EPS New Lows which show pathetically low numbers on both lists currently.  We suggest investors wait for a better odds investing environment signaled by a strong breadth and volume breakout in either direction, and some new high/new low leadership to develop before wading back into this market with much allocation - even on a trading basis.

 
Chart 2:  A lack of 90% up or down-days likely means a lack of market follow-thru in either direction.  Crtsy Bloomberg

 
Chart 3:  US bonds trying to follow foreign bonds higher with a breakout - but more needed.  Crtsy Bloomberg

In last week's column we highlighted the base breakouts in several foreign bond markets, and noted that Japanese bonds were a potential trade.  Foreign bond markets continue irregularly higher, led by Japanese bonds since then.  The US bond market is trying to breakout of a base of sorts here as well.  Follow-through on good volume over the last week's highs should confirm a cyclical bullish bias in US bonds and show the beginning of more market focus on downside risks as commodity inflation eases up.  However we suspect that US bonds will have to rise much more strongly and rate declines will have to flow through to private sector rates as well for the decline in interest rates to have too much of a positive effect upon either stocks or the economy.  A full-scale focus on downside risks may be needed before the real-estate led financial problems can begin to reverse.  So far we don't see that happening yet.

Meanwhile the dollar continues to hold up quite well.  The dollar has hit a resistance zone that should hold it back for awhile here, but its action looks quite resilient so far.  It is starting to appear that this important resistance will only be able to lead to a consolidation of the dollar rally, rather than a correction of its very steep recent gains.  Investors long UUP, the dollar long ETF, could even consider adding on a clear breakout above the current resistance zone in the period ahead.  It remains to be seen whether the dollar rally is coming solely from weakening economic evidence abroad, or whether a US consumption recession is also part of the equation.  A true US consumption recession remains a primary risk to a much deeper and broader global recession that should be watched for closely. 

 
Chart 4:  Dollar only consolidating so far off of resistance zone - still staying resilient.  Courtesy Bloomberg

Commodities are also rallying off of a clear support zone, and oil and Natural Gas markets are trying to figure out of this weekend's hurricane has the potential to do damage.  Raise stops on DDP the short commodity ETF, under the last week's low to make this nearly a break even trade.  Let's see how strongly commodities can rally off os support.  A break under 380 by the CRB index would be quite bearish for the index short-term.

Our long/short strategy remains happily 100% in T-bills awaiting new trades.  Since our last update we got close calls on the buy side from IDSA with a close calls on the short-side from NT, and no valid signals either short or long.  Check out www.midasresourcegroup.com for daily listings of Top EPS/RS New Highs and Bottom EPS/RS New Lows to make sure you catch all potential breakouts meeting our criteria.  As the chart at the bottom of the page illustrates, we do not have top RS/EPS new highs or bottom RS/EPS new lows in a clearly dominant position (40 over the other for 5 or more days in a row) to signal a good environment for either long-side or short-side dominated activity. This is often the most dangerous, volatile, and tricky phase of a bear market and with neither breadth or volume or leadership strong in any direction right now, we suggest the sidelines heavily.

For those not familiar with our long/short strategies, we suggest you
review my book "The Hedge Fund Edge," my course "The Science of Trading," my video seminar, where I discuss many new techniques, and my latest educational product, the interactive training module. Basically, we have rigorous criteria for potential long stocks that we call "upfuel," as well as rigorous criteria for potential short
 stocks that we call "down-fuel." Each day we review the list of new highs on our "Top RS and EPS New High List" published
on www.midasresourcegroup.com for breakouts of four-week or longer flags, or of valid cup-and handles of more than four weeks. Buy trades are taken only on valid breakouts of stocks that also meet our up-fuel criteria. Shorts are similarly taken only in stocks meeting our
down-fuel criteria that have valid breakdowns of four-plus-week flags
 or cup and handles on the downside. In the U.S. market, continue to only buy or short stocks in leading or lagging industries according to our group and sub-group new high and low lists. We continue to buy new long signals and sell short new short signals until our portfolio is
100% long and 100% short (less aggressive investors stop at 50% long
 and 50% short).   We keep capital in T-bill cash while waiting for more trades.

The chart below shows that neither Top RS new highs (available on www.midasresourcegroup.com) or Bottom EPS/RS New Lows are over 40, let alone greater than their opposite series by 40 or more.  Heavy cash and alternative asset class defense should be utilized!