Stock Market Goes BiDirectional

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

U.S. stock market action on Monday was highly unusual with the Dow Jones Industrials rallying strongly while the Nasdaq experienced major selling. This behavior is bearish and indicates lower stock prices in the future.

The open set the tone for the day with the Dow up over 100 points shortly thereafter and the Nasdaq down more than 20 points. The Dow rallied even further and the Nasdaq sold down to even lower levels. By the close however, not much had changed from the open. The Dow was up 72 points to 12,921 and the Nasdaq down 23 points to 2988. The S&P 500 and the small cap Russell 2000 were caught in the middle and were barely changed. The S&P 500 fell 0.69 points to 1369.57 and the Russell 2000 rose 1.79 points to 798.08.

The explanation for the Dow Industrials rally was the supposedly good retail sales numbers (fueled by inflation with rapidly rising gasoline prices leading the way) and bailout poster child Citigroup's (C) mediocre earnings report. The culprits on the Nasdaq were easy to spot with big selling in Apple Computer (AAPL) and Google (GOOG) dragging the index down. Apple closed at 580, down $25 (4.2%) , and Google was lower by $19 (3.0%) for a final price of 606 at the end of the day. It was the second day of major selling for Google. Both drops indicate the big money is getting out of these stocks.

All the major four indices closed below their 50-day simple moving average (a strong technical negative). This was the first time the Nasdaq has done so this since last December. The Dow has done this for six days in a row however and the Russell 2000 for seven. If a stock or index moves below its 50-day moving average and stays there for several days, it should be assumed that it will eventually fall to its 200-day.  This is still in the realm of normal bull market activity.

Non-confirmation in a bull market should always be considered a negative for stocks. A bullish behaving Dow and a bearish acting Nasdaq is not a good sign. The Dow Industrials itself has a separate non-confirmation problem with the Transportation Average. Even though the Industrials went to new highs in the last few weeks, the Transportation Average has not. Perhaps it still will, but it doesn't look like it will happen. This has been a reliable market sell signal for over 100 years.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

This Week's Selling Indicates Bear Market Still in Play

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


All four major U.S. stock indices began to form a bear market trading pattern during July. The rally that started early in the month paused the formation of that pattern, but didn't reverse it. Then the selling this week added more evidence that stocks are in a bear environment.

The most basic definition of a bear market is a 50-day moving average trading below the 200-day moving average for one or more stock indices and the 200-day moving down. Frequently, people only look for this pattern on one index such as the S&P 500, but that isn't enough. All the major indices - the Dow Industrials, the S&P 500, Nasdaq and the Russell 2000 - should have this pattern before a bear market can be declared.  You might also add the Dow Jones Transportation index to the list as an additional confirmation.

In early July, the simple 50-day moving average fell below the 200-day for both the S&P 500 and the Dow Industrials. Then in the middle of the month the same thing happened on the Nasdaq chart. By the end of the month, the Russell 2000 also experienced this cross (sometimes referred to the cross of death by technical analysts). However, stocks had been rallying since early July and the Russell's cross was very tentative. The 50-day barely dropped below the 200-day and then traded in tandem with it for two-weeks. The selling this week put some space between the two lines and prevented the 50-day from rising back above the Russell's 200-day.

So the 50-day crosses are in place for all the four major stocks indices. The falling 200-day moving averages are still missing however. This line is still rising, although just barely, for the Dow Industrials, S&P 500, Nasdaq, and the Russell 2000. Watch for the 200-days to turn down. The 50-day has also not crossed the 200-day on the Transportation Index. When this happens and the 200-day moving averages start declining, the bear market picture will be complete.

While a large number of economic reports for the last two months have shown a faltering U.S. economy and the Federal Reserve has confirmed that things look gloomy, stocks nevertheless managed to rally for 5 weeks in July and early August. Investors should keep in mind that there is a major election in the United States in early November. Other hard to explain bullish rallies are therefore possible until that time, so be prepared for anything. Reality eventually triumphs in all markets however and that favors the bearish view.
   
Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.