Technical Stock Market Report

The good news is: The mid and small cap indices closed at all-time highs last Wednesday.

The negatives:  Negatives are still hard to find.

Last week’s pull back followed the bull market script perfectly developing very few new lows and the blue chips leading the way down.

The positives

Prior to major tops there is usually deterioration of the breadth indicators and the secondaries underperform the blue chips.  We have seen none of that.

Advance - Decline lines (ADL) are a running total of declining issues subtracted from advancing issues.  The ADL calculated from NYSE issues (NY ADL) has been the primary breadth indicator for many decades.  Until 10-15 years ago it had a modestly negative bias which indicated weakness near market tops.  The composition of issues on the NYSE began changing about 25 years ago with in increase in the number of fixed income issues traded on the exchange.  Fixed income issues accumulate value daily until they go ex-dividend when they take a loss in the amount of the dividend.  Because of this, ADL's calculated from fixed income issues have a wildly positive bias.  Currently about 50% on the issues on the NYSE are fixed income giving the NY ADL an extraordinarily positive bias. 

The chart below covers the past 40 years showing the S&P500 (SPX) in red and the NY ADL in blue.  Dashed vertical lines have been drawn on the 1st trading day of each year.

You can see how the character of the NY ADL changed sharply around 2000, when the FED began serious manipulation of interest rates.

The NASDAQ has not been infested with a large number of fixed income issues so it has remained pretty consistent.  The issue with the NASDAQ ADL is it has had an extremely negative bias.

The next chart is similar to the one above except it shows the NASDAQ composite (OTC) in blue and the OTC ADL in green.

The next chart is similar to the one above except it covers the past 10 years.  The negative bias is apparent as the OTC ADL made its all-time low a little over a year ago.

The next chart is similar to those above except it covers the past year and dashed vertical lines have been drawn on the 1st trading day of each month.

The point of this windy exercise is the OTC ADL hit a multi-year high last Wednesday so, by this indicator with its traditionally negative bias, the market is in good shape.

The next chart is one I usually show covering 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 vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the neutral 50% level.

OTC HL Ratio tumbled to, a still strong, 76% on Thursday and Friday of last week

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.

NY HL Ratio dropped to 60% on Friday.

Conclusion

As soon as I complained of the summer doldrums in January, the market snapped out of it.  The blue chip indices were down every day last week, while the secondaries notched all-time highs on Wednesday before joining the blue chips for a losing week.  Strong breadth indicators suggest this is just a pull-back in a bull market… and it should be over soon.

I expect the major averages to be higher on Friday, January 31 than they were on Friday, January 24.

Last week’s positive forecast was a miss.

********

Disclaimer: Mike Burk is an employee and principal of Alpha Investment Management (Alpha) a registered investment advisor. Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy.   Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com).  Historical data is from Barron's and ISI price books.  The views expressed dare provided for information purposes only and should not be construed in any way as investment advice.  Furthermore, the opinions expressed may change without notice.