Index price advance on weak internals

The SPX took out the 1245.86 previous rally high, closing at 1248.27 +0.4% on option expiration Friday and +1.0% on the week. The SPY hit an intraday high of 125.75 vs. the previous rally high of 124.74 and closed at 125.13. The SPY is +7.6% low to high in 26 days since the 10/13 116.98 low and is at our extended 3-month volatility band. "They" continue to roll up the SPX in price (+2.1%) the past two weeks on a smaller amount of big-cap stocks as the net advances minus declines for the two weeks was just +988 and then only +125 last week as the SPX hit new highs. This is also evidenced by the $NYX composite bullish percentage of just 58% vs over 73% in August 2004 and a lower top of 69% on 09/12 following the SPX 1243.13 09/09/05 secondary high. The same time frame percentage for the SPX was 76% in August 2004, 70% in September and 61% on Friday, with the SPX at new highs. The price-weighted Dow was just 53% on Friday and because it is a price-weighted index, it is easy to mark up on a small number of the higher priced stocks.

Longer-term bond yields have declined the past nine days and gold has broken out to new highs with a 489.15 intraday high on Friday and closing at 485.80. Both moves are synonymous with increased terrorist activity and the France riots. The Fed has raised the three-month T-bill rate to almost 4% as the yield curve flattens Goldman Sachs Commodity Index (GCSI) continued its decline from over 7600 in early September  closing Friday at 6403 vs the 200-day EMA of 6492. That decline is due primarily to the crude oil (WTIC) decline of 21% to Friday's 56.35 intraday low and close of 57.21. The 200-day EMA is 57.87.  The XLE had declined -18% from 54.65 (09/22) to 44.94 on 10/20, which was followed by a bounce off this 200-day EMA zone to 51.29, closing Friday at 49.04. The energy stocks' daily volatility remains a primary source of daytrading profits, especially with the many RSTs that occur on a regular basis, and I don't see that changing any time soon regardless of what crude does. The US Dollar Index has broken out of an  inverse head-and-shoulders pattern, that starts around 6/04 with the head down at 81. Any continuation could take the the $US up to the $100 level, but first it must get past the 200-day moving average which is around 95.

The strength in the dollar has been a big part of the acceleration in the basic materials (XLB | Quote | Chart | News | PowerRating) and industrials (XLI | Quote | Chart | News | PowerRating) which you can see in the weekly momentum composite chart below. I included the momentum numbers from the 10/13/05 SPX 1168 low although not all sectors bottomed on the 13th as there are always some divergences, but it gives you a clear picture of the relative momentum through the 11/18 SPX close of 1248.

This momentum section is just 25% of my overall proprietary composite which I use to determine high probability/investing opportunities for institutional clients. The obvious week-to-week change in the total is the acceleration of the XLB to 51 (extremely overbought), XLI to 41, and the XLF declining to 40 from 47. The QQQQ remains extremely overbought while the XLK is also extremely overbought as it jumped to 45, led by a +16.5% advance in MSFT since 10/11, which is 12.26% of the index weight, Intel (INTC | Quote | Chart | News | PowerRating) +13% since 11/1 (7.3% index weight) and the continued uptrend of IBM and HPQ, now 90%  since 8/04. Also declining last week was the XLP (consumer staples) which is the defensive stocks and the (IWM | Quote | Chart | News | PowerRating)  (Russell 2000) which can be an early sign of bull cycle determination as the big-cap stocks start to outperform the small caps once again.  Keep your eye on this ratio. The momentum chart is an hourglass, so from a contrarian perspective there should be no confusion about the risk level of initiating new long positions into the current price strength with the negative divergence in breadth and the high levels of daily NYSE lows. It is a short-side trading bias strategy for Inner Circle members. Suffice to say, about 80% of individual stock movement is due to the market, so stay with a diligent top-down approach: Market, Sector, Stock, and you will make more intelligent trading decisions regardless of which time period you are comfortable with.

Have a good trading day,

Kevin Haggerty