Tuesday, July 21, 2009

Absolute Breadth Warning Of A Top

Coming back to the point that we are another critical juncture, the T2101 Absolute Breadth indicator is now at a level that as been associated with tops and bottoms in the past. Frequently when this indicator, which measure the absolute difference between advancing and declining issues, moves above 60 a top or bottom may be forming. As we are currently in a rally, the possibility of a top is the concern. In March of 2007, there was a surge to mark the top, a pullback in the indicator, and then another surge to mark the bottom of that correction.

This is why I am taking it slow adding to index positions.


dave said...

In one of my first comments in Nov i wrote:

One of the most important concepts and least understood is the difference between a mkt or stk that IS oversold or overbought and THE ABILITY TO GET (& stay. That's a definition of momentum.) oversold or overbought. The mkt or a stk can stay oversold or overbought for a long time.

Merely being oversold or overbought is relatively unimportant.

In other words, when they were going up in 2008, would you have rather been long POT or MO ? When they were going down, would you have rather been short POT or MO ?
"...or something else is going on, something more bullish I think."

"...or we will soon see one heck of a breakout."

That's because "...so many stocks are developing nice basing patterns and remain in uptrends, or are in fact breaking out."

There are so many stks that have been up 8 or 9 days in a row. Institutional types, highly liquid stks at that. Big Mo !!


dave said...

One small concern that i have is under-performance by small caps.

That seems slightly odd given consumer confidence.

They participated in the March rally very well. Otherwise mkt leadership has been excellent.


Anonymous said...

Yes, the number of stocks setting up great looking bases is the best I have seen since 2006. However, I will say that at tops, there are always alot of stocks that "look" like they're forming bases that end up failing.

This was my lesson with IBD in 2000. IBD was very subtle in its communication to readers about the fragile nature of the rebound in the summer of 2000. I kept those papers and reread them years later. I can see it now, but you had to read between the lines, which I was not experienced enough to do then.

That will be something to watch out for in September/October when this rally matures.

The lagging small caps is clearly due to the pressure on small businesses in the current environment. They do not have hoards of cash like the large caps, and now do not have access to credit.

I spend alot of time talking friends with small businesses, and they are struggling big time. This is not at all accurately reflected in the politicized media.