Reply #1: Market Observation [View All]

Market Potpourri
BY FRANK BARBERA

The quiet interludes, the ones without the heavy drama of wide swinging market days, these can often be just as nerve wracking as the fast trending markets. To some degree, from an analytical point of view, the one benefit that we find when volatility is high is that normally markets are trending strongly in one direction. At times like that, the trend is always your friend, and experienced traders know to basically use counter trend movements to initiate new positions in the direction of the basic trend.

However, at other times, we find markets where the trend may appear to be less pronounced, or on the verge of some type of more important trend change. These much quieter markets can be nerve wracking as it can be extremely difficult to evaluate when to get in, whether to stay in, or where to get out. In the case of the US stock market, the pace of the robust multi-week, indeed, multi-month advance has slowed more notably in the last few weeks. In this market, we see the indices almost ‘drifting’ higher, but seemingly starting to lack some of the high conviction that was present throughout much of the earlier advance. In my view, this is most likely a hint that the beginning of a distribution process is getting underway, and that the advance is starting to lose some internal technical strength. Yet so far, the drop off in market technicals has been ‘modest’ at worst, mostly showing up in moderately lower values in the markets momentum indicators. This is not uncommon as an advance begins to mature. Yet, while some price momentum gauges are slowly beginning to weaken, other measurements of internal market strength are still holding together. Take the action of the daily Advance-Decline for a moment.

-see chart-
.....

Finally, I end with a strong note of caution on one final sector, that being the sector of High Yield “Junk’ Bonds. In this case, my index of Junk Bonds has experienced an enormous advance, the likes of which have never been seen before especially in such a short period of time. In passing, we note that medium term Daily RSI values are now at the highest, most overbought values seen since early 2007, when the index last recorded a major peak. While these bonds throw off an incredible yield, they are relatively a lot more over-extended than the stock market as a whole, and this is one area I would be watching very closely for signs of a substantial downside correction.

http://www.financialsense.com/Market/wrapup.htm