A Near-term Market Review

by George Leong, B. Comm.

Markets continue to be flying high in a broadly based move. The buying was broadly based, with buying returning to financials, housing, cyclical, and restaurant stocks. Anything related to economic renewal and increased consumer spending is attracting buying.

The DOW is within grasp of 10,000, the NASDAQ is over 2,100, and the Russell 2000 is above 600. Markets are displaying strong breadth and sentiment, and they closed higher for the eighth time in nine sessions. Small-cap stocks are especially strong, reflecting the optimism towards economic renewal. Trading volume was above the short- and longer-term moving averages, which is bullish during an up day and indicates increased market participation.

My near-term technical assessment is as follows:

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The new-high/new-low (NHNL) ratio simply measures the number of stocks touching a new 52-week high versus the number of stocks that have declined to new 52-week lows. The theory is that, in a bullish market, investors quickly bid up stock and you see a rising NHNL ratio. When investors get nervous, less new highs are made and the NHNL ratio will tend to decline, thereby giving you a warning. At the other end of the spectrum, bear markets have more new lows than new highs.

There is a general guideline that we use to examine the NHNL ratio. 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.

Investor sentiment continues to be bullish. Investor sentiment on the NYSE has been bullish in 106 of the last 109 sessions (97% during this time) back to April 9. The readings have been extremely bullish at over 90% since July 14 when the DOW was trading at 8,359 and NASDAQ at 1,799. The charts show the bullish trend.

In the technology area, the NASDAQ has shown bullish investor sentiment in 86 of the last 109 sessions, or 77%, and in each session since July 14. The positive sentiment will help add support to stocks.

The NASDAQ is holding and edging higher, above 2,000. The near-term technical picture remains bullish and the Relative Strength has strengthened. The NASDAQ is up 34% this year.

Market breadth as indicated by the advance-decline line (A/D) has been strong, with seven of the last 10 sessions above 1.0. The near-term trend is up.

The index is above its 20-day moving average (MA) of 2,030 and its 50-day MA of 1969. The index is also above its 200-day MA of 1,694. The near-term target is 2,199. The NASDAQ is extremely overbought, so watch for some selling pressure.

The CBOE NASDAQ Volatility Index (VXN) is a barometer of near-term market volatility based on NASDAQ 100 index option prices. A high VXN indicates maximum fear and a low VXN indicates reduced apprehension.

The VXN has been on a decline. The current trend is down and
indicates less volatility.

On the blue-chip side, the near-term technical picture is bullish with strong Relative Strength.

The DOW is holding above 9,000. The index is above its 20-day MA of 9,501 and well above its 200-day MA of 8,398. The near-term targets are 9,772 and 10,000. The index is extremely overbought, so watch for some selling pressure.

The near-term technical signal for the S&P 500 remains bullish and the Relative Strength is strong.

The S&P 500 is holding above 1,000, its 20-day moving average of 1,025 and its 50-day moving average of 990. The near-term target is 1,106. The index is extremely overbought, so watch for some selling pressure.

The CBOE S&P 500 Volatility Index (VIX) has been on a decline. The current trend is down and indicates less volatility.

The Russell 2000 is bullish with strong Relative Strength. The index is above 600 and its 20-day moving average of 580. The near-term targets are 647. The index is extremely overbought, so watch for some selling pressure.

I advise riding the upward wave, but take some profits on some of the big gainers. At the same time, monitor your positions and be careful in chasing big gains.