When We Might Be Able to See the Bottom

The DOW has closed higher in six of the last seven sessions and technology is assuming a leadership role in the markets' move higher. With this, we are beginning to hear the term "bottom" for this market. The current rally is encouraging, especially given the recent selling, but I still cannot call a bottom. Yes, major stock indices have bounced off the decade lows, but it may just be a case of a bear market rally and we could see renewed selling down the road.

In my view, the key will be how markets trade in the upcoming weeks. Should markets hold and advance over the next few weeks, it may be safe to call a bottom at that time. The reality is there is plenty of cash on the sidelines waiting for some early signs of a market turn. Once that happens, there will be a lot of money to be made. The important thing is that you want to make sure you have cash on hand to buy at some point in the future.

Technically, there are encouraging signs, although they are premature at this stage. Market breadth on the NASDAQ and NYSE as indicated by the advance-decline line (A/D) has been positive in five of the last six sessions. What you want to see is for this positive trend to continue.

Another technical measure I like to look at for trading 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. 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. 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 107 of the last 130 sessions having a reading below 20%, but the last three sessions have been neutral. There have only been five readings over 70% since May 22. There is a similar picture for the NASDAQ, with only four bullish readings since October 11, 2007. The near-term trends on both are negative.

Again, the overriding sentiment is bearish, but you should watch to see if readings continue to improve. However, there is a long way to go. The reality is that, without bullish readings above 70%, the sustainability of rallies will continue to be in question. We have not had a bullish reading on both the NYSE and NASDAQ since early January and before that in August and May 2008, so you'll understand why I'm not that bullish now despite some of the euphoria shown by some market watchers.

The technical picture is important and so far it is way too early to call for a bear market reversal. Stocks may trade sideways in a wide range in the immediate future.

Profit Confidential

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