Wednesday, 8 December 2010

Is a big surprise for the stock indexes around the corner?

It looks like that everytime the market cannot move upwards purely due to buying power/interest then either the FED, the ECB, the IMF or the US and German governments will do the trick. First we had the QEII, then we had the Irish bailout; the ECB followed by buying bonds that nobody else wants to hold, and yesterday we had Mr "O" extending the bush tax cuts.....ohhh, and the news that the European bailout fund will not increase in size (and its TMNs opinion that size does matter these days) was just thrown in the rubbish bin.
TMN believes that no matter how hard they try, the boat will eventually sink. Some European stock indexes already look weak but the US and German stock indexes present a different story. For instance, Italy and Spain have seen the top a year ago, with Belgium showing some weakness lately and not following the recent rally.

So what about the recent rally in the US? TMN has discussed  previously the advance-decline index and anticipated a touch of the lower trendline at (4) where the market would either bounce or breakdown. TMN favoured a break of the trendline but that did not materialized. As a result, the bounce off the lower trendline has produced a rally that took us to new highs since March 2009. Nevertheless, TMN would like to be cautious as the index has not  made any new highs yet to confirm the recent new highs in the stock indexes.

Additionally, there are some other indicators that show negative divergences for quite some time now, thus, making the recent new highs a bit suspicious. For example, TMNs volume indicator shows a negative divergence as, for the moment, it has made its high back in April. The longest negative divergence appears at the percentage of stocks above their 200MA; this index has seen its high a year ago and it looks like the downward trendline still provides good resistance. Similarly, NYMO shows negative divergences for about 6 months and its very close to zero. All the above makes TMN to believe that there is a great possibility that the market is due for a big surprise. Of course, a breakout of the advance-decline index and volume indicator will mean continuation of the recent rally, but for the time being TMN will stick with the negative divergences.

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