Technical Stock Market Report

The good news is:  The Russell 2000 (R2K) and S&P mid-cap indices hit all-time highs last week.

The Negatives

Typically at a bottom new lows and downside volume disappear.

Relatively, new lows have disappeared, however, downside volume has not. A huge increase in upside volume has pushed the major indices to all-time highs, but, downside volume has persisted at a very high level.

The first chart covers the past 6 months showing the S&P500 (SPX) in red and a 5% trend (39 day EMA) of NYSE downside volume (NY DV) in brown. Dashed vertical lines have been drawn on the 1st trading day of each month. NY DV has been plotted on an inverted Y axis so decreasing downside volume moves the indicator upward. Up is good.

When the market hit a low in late June (left side of the chart) NY DV moved sharply upward. NY DV moved upward for a couple days early this month, but has leveled off while the index continued to move sharply upward.

The next chart is similar to the first one except it shows the NASDAQ composite (OTC) in blue and OTC DV, in brown has been calculated with NASDAQ data.

This chart is similar, in every way to the one above.

The Positives

The number of new lows is still running a little high. New highs, on the other hand have expanded nicely.

The next chart covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows (OTC HL Ratio), in red. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral level.

OTC HL Ratio finished the week at 86%, very strong.

The next chart is similar to the one above except it shows the SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.

Bonds had a bad week and about half of the issues traded on the NYSE are fixed income related. Considering the fixed income problem, NY HL Ratio at 78% is pretty good.

The chart below caught my eye because of its extreme level.

The chart shows the OTC in blue the indicator, OTC ADL %UP, in orange, is the percentage of the previous 11 days the OTC ADL has been up. The parameter, 11 in this chart is usually set to 6. OTC ADL is a running total of NASDAQ declining issues subtracted from advancing issues. For the indicator to hit the top of the chart the OTC ADL has to have been up every day for the past 11 days. The last time that happened was in June 2003 shown in the next chart.

The next chart is similar to the one above except is shows the period from March 2003 to September 2003.

The last time this indicator touched the top of the chart (11 consecutive days of OTC ADL upward movement) was early June 2003, in the middle of a long term upward move.

My OTC data goes back to January 1978.

In the late 1970’s and early 1980’s when OTC ADL %Up (11) touched the top of the chart it often indicated a short term top. Since the early 1990’s it has usually occurred near the middle of an upward move.

Prior to the early 1990’s the OTC was a small cap index similar to the R2K now and companies would move to the NYSE when they were big enough. The OTC shifted from a small cap to a large cap tech index beginning in the early 1990’s.

Money Supply (M2) And Interest Rates

The following charts were supplied by Gordon Harms. M2 growth has leveled off from its elevated trend of the past 6 months.

Interest rates are where the action has been.

Interest rates moved sharply upward in the past two weeks, but the yield curve has remained flat.

Conclusion

All of the right things are happening for a bull market. New highs are increasing, new lows are decreasing and the secondaries are stronger than the blue chips. The only problem I see is downside volume, which has remained persistently high.

I expect the major averages to be higher on Friday November 25 than they were on Friday November 18.

Last week’s negative forecast was a miss.