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September 5, 2006

Back to Work

While perusing charts over the long weekend, I decided to perform a review of market internals. I was struck by one comparison in particular: the percentage of stocks on the S&P 500 above their 200-day moving average. While I do not typically put much credence in the widely-accepted MAs such as 50 and 200, they can be quite useful in judging the strength of recent moves.

As you can see in the charts below, there is a huge divergence between the performance of the SPX and the number of its component stocks rising above their longer-term moving averages. What this comparison tells us is that the rise in the index has been fueled by a very narrow group... an unhealthy situation for bulls.

stock chart

stock chart

You can also see marked on the SPX chart that the rally has formed a bear flag. These formations tend to be quite reliable. Add in seasonality and extreme complacency, as measured by the near-record-low level of the VIX, and we have a medley of indicators pointing to trouble brewing in the market. While no read is ever a sure thing, the combination of factors coming together at this juncture is compelling.

Today's session was rather muted, though the NDX saw nearly a one percent gain. The big headline for the day was the discovery of a presumably large oil field in the Gulf of Mexico by Chevron and a group of partners. The news had the effect of knocking oil for about a half buck, and may put a dent in the peak oil theory. Those arguing against peak oil have frequently claimed that higher oil prices will make exploration of previously un-economic ventures more feasible, and this group is sure to be found shouting more loudly for a while.

As I wrap up this post, I see some headlines screaming across my console saying that Intel has just announced a restructuring plan that will involve about 10,000 job cuts and a $1B cut in capex. The job cuts will invoke a $200M charge and save the company $3b per year starting in 2008. Intel optimists have to wonder: if the environment is a strong as management claimed during recent earnings calls, why do they need to restructure? It would make sense for this announcement to be followed by an earnings warning a few weeks down the road. Shares of Intel are dropping 1.5% in after-hours. I am very curious to see how the shares trade tomorrow.

Disclosure: Short INTC; Long INTC Puts


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