The stock markets are showing some oversold buying at this point, as the DOW has edged higher in each of the last two sessions, and is looking to exte...
The stock markets are showing some oversold buying at this point,
as the DOW has edged higher in each of the last two sessions, and is looking to extend the streak. Optimism towards the vote on President Obama's $825-billion economic stimulus plan is driving up some enthusiasm. Yet there continues to be a false sense in the markets, as stocks remain vulnerable to further downside moves.
The fourth-quarter earnings have been largely weak, which is nothing unexpected. There have been few positive surprises. Companies have reduced guidance going forward or have not offered guidance due to the economic uncertainties and the length and depth of the global recession. We feel that trading will continue to be cautious and driven by headlines relating to the stimulus program, earnings, and the economy.
With interest rates as low as they can go, the Federal Reserve will likely pursue additional avenues to fuel economic growth and drive up consumer and business confidence.
Investor sentiment remains extremely bearish and this will likely cap any potential of a sustainable rally. Let's take a look at investor sentiment and option volatilities.
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.
The NHNL on the NYSE remains extremely bearish, with 82 of the last 99 sessions showing a reading at below 20%. There have only been five readings over 70% since May 22. The NHNL on the NASDAQ has also been weak, with only four bullish readings since October 11, 2007. In all, 87 of the last 99 sessions were below the bearish 20% level. The near-term trends on both are down and this will cap any likelihood of sustainable gains.
As far as option volatilities, the CBOE NASDAQ Volatility Index or VXN -- a barometer of near-term market volatility based on NASDAQ 100 index option prices -- has been rising in the recent weeks. Watch to see if it continues, as this would indicate a near-term bottom.
The CBOE Volatility Index or VIX -- a barometer of near-term market volatility based on the S&P 500 index option prices -- has also been rising. The five-day VIX is well above the 200-day moving average (MA) of 35.71. Watch to see if the upward move continues, as this would indicate a near-term bottom.
A test of the November lows would be interesting, as far as seeing if a bottom is in place. Having a solid bottom will give some confidence to investors, as they would have some sense of the downside risk.
Profit Confidential
---
http://www.profitconfidential.com/
LOMBARDI PUBLISHING CORPORATION
News, Analysis, and Information Services Since 1986.
One Million Customers in 141 Countries.
Lombardi Publishing Corporation
Financial Publications Division
350 Fifth Avenue, Suite 3304
New York, NY 10118-3304
---
Copyright 2008; Lombardi Publishing Corporation. All rights reserved. No part of this e-newsletter may be used or reproduced in any manner or means, including print, electronic, mechanical, or by any information storage and retrieval system whatsoever, without written permission from the copyright holder.
