Technical Stock Market Report

The good news is:

The pull back of the last half of January appears to be over.

The negatives

In the recent pull back, the small caps represented by the Russell 2000 (R2K) were the biggest losers among domestic issues, they were also the weakest in last weeks rally.

The chart below covers this year beginning with December 31 of last year showing the major indices on log scales for comparison.  Dashed vertical lines have been drawn on the 1st trading day of each week.

The NASDAQ composite (OTC), in blue was the strongest at the top, fell the least and recovered the most.  The S&P 500 (SPX), in red, was the weakest at the top and had a strong recovery last week.  The R2K, in magenta, was strong going into the top, but fell the most and has had the weakest recovery.

This is not a pattern I like to see.

It is early in the recovery, but, if this pattern of weak secondaries persists we will be looking at a developing top.

The positives

New lows approached troublesome levels last Monday, but, by the end of the week, returned to comfortable levels.

The chart below 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 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 fell to its lowest level in over a year last week, but recovered to neutral on Friday.

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 has been weaker than OTC HL Ratio, but had a stronger recovery.  Between Monday and Friday of last week, NYSE new lows declined by nearly 90%.

Money Supply (M2)

The money supply chart was provided by Gordon Harms.

Money supply growth has been following its trend pretty closely.

Conclusion

The sharp reduction in new lows at the end of last week implies the recent pull back is over.

I expect the major averages to be higher on Friday February 14 than they were on Friday February 7.

Last week the R2K was down while all of the other major averages were up so I am calling last week’s positive forecast a tie.

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Disclaimer: 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.