Why the Market Rally Probably Won’t Hold
Monday, April 7th, 2008
By George Leong, B.Comm. for Profit Confidential
Stock markets are currently search for some direction but appear to be trading in a sideways pattern given the marker uncertainties. From a technical perspective, investor sentiment remains largely weak and does not support a sustainable rally. Market breadth, as indicated by the advance-decline line (A/D), is mixed, with six of the last 10 sessions above 1.0. The near-term trend is sideways.
An indicator that I like to look at is the new-high/new-low (NHNL) ratio, a measure of the number of stocks touching a new 52-week high versus the number of stocks that have declined to new 52-week lows. When the ratio is above 70%, it is bullish; below 70%, it is a warning; and below 20%, it is bearish. Watch the sentiment to see how the market is feeling.
Taking a look at the current state of the markets, the NHNL on the NYSE continues to be weak and negative, with readings below the bearish 20% level in 16 of the last 23 sessions, or 70% of the time, although six of the last eight sessions were above 20%. The near- term trend is down but flattening.
Moving over to the technology sector, the NHNL on the NASDAQ has also been negative, with readings below the bearish 20% level in 16 of the last 23 sessions, although six of the last eight sessions were above 20%. The near-term trend is down.
The fact is that, without a rise in investor sentiment, the sustainability of upside moves in the market holding is unlikely. Investors need to feel in control and full of positive sentiment before they are likely to buy, and not to sell on rallies.
While there is a light moderate bullish overtone in the market, conditions are somewhat overbought at this time, so there could be some near-term selling pressure. My view remains that we should be prudent and not overly anxious.
Next Post: 2008: A Transition Year for StocksPrevious Post: More Proof Stock Market Has Discounted Worst for the Economy
Tags: stock market, stock market rally
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
