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Reply #1: WrapUp by Ike Iossif [View All]

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ozymandius Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Apr-28-04 07:11 AM
Response to Original message
1. WrapUp by Ike Iossif
Market Internals Vs. Price

Over the past few weeks we have had a rather peculiar development in the equity markets. All three major indices have moved sideways while remaining below resistance, but above support! From a price-only-based point of view, the action has been consistent with the type of price behavior that we see during consolidation periods, which precede successful break-outs. However during the same period, the internals have been more consistent with failed consolidations, which precede break-downs. Consequently, the end result has been a bifurcated and choppy market characterized by lack of follow-thru in either direction.


The current pattern of the McClellan Volume Summation Indexes at point #3 looks very similar to the pattern at point #2 and at point #1. Point#1 marked the beginning of a horrendous decline, while point #2 marked the beginning of a spectacular rally. Even if we didn't bother to do any further analysis, the very fact that the current pattern is almost identical to a pattern that in the past preceded both a substantial decline and a substantial advance should be enough of a reason for rational investors to consider both outcomes and devise their investment and trading strategy accordingly.


In addition, we have observed a rotation by institutional investors out of high beta stocks, and into low beta and more defensive issues such as health care, food, energy and even pharmaceuticals. In other words, investors are no longer exhibiting a robust preference to take on risk. In fact it's quite the opposite, as they have become more risk-averse. A robust appetite for risk is not only an essential element of every bull market, but also a sudden shift in the level of risk tolerance, which almost invariably results in above-average market declines.

In other words -in my view- the equity markets at the moment are not "firing on all cylinders." The price action exhibited by the indices is positive, but it is due to positive price action by a small number of stocks with high capitalization, which disproportionately affects the price of the index itself.
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