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Market Internals and Externals
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: July 23rd, 2007 at 12:36 pm EST
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It’s been quite volatile market of late, so I wanted to touch upon some not-so-evident facts that could determine short term direction. One thing’s for sure, we’re in for a bumpy ride…whether up or down.
First off I want to talk about the advance/decline line, or more appropriately…breadth. When entering a bull or bear phase, one likes to see solid action slanted toward breadth. Obviously in an uptrend, strong breadth (2-1 or better) is a comfort. The closing figures are most important, but the intraday action is most telling. The swings of breadth can make your stomach turn. Lately we’ve seen a move from strong to weak, weak to weaker. There has been one strong day of solid breadth and that was July 12…the Dow was up 285 points. So, what does this mean? Simply put, institutions are fading (selling) the early rallies and taking up room on the sidelines.
Next, the VIX is a concern…mainly the height of the price. For reference, the VIX prices in risk based on option pricing. An elevated level of risk makes options more expensive. For a few yrs now, the relative VIX level has been very low. But the trend recently has shifted higher as more have become nervous with the highs reached. That fear is justified, and has shown the way by buying cheap insurance via puts. But with a rise in volatility that insurance becomes more expensive…so, maybe some selling will occur? We’ll have to wait and see.
A rarely followed indicator is the Committment of Traders report. Posted in Barron’s each week, it summarizes the level of committment to SPX, Nasdaq and Dow contracts by commercial hedgers and speculators. In most cases, you want to be on the side of the hedgers when they are positioned on one side or the other. Currently, they are VERY LONG the SPX 500 contracts…as long as they’ve been in 10 years. In the past, whenever the hedgers were long contracts, a bull rally ensued.
Finally, the new high/new low list is something to discuss. With markets breakout out to new all time highs, one would expect this list to be jumping out at you. This is not the case, in fact the list is becoming much weaker, not stronger. We’ll have to see how this develops in the coming weeks and measure the impact, but it certainly cannot be ignored.
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Bob Lang, Indexes, Stock Market
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One Response to “Market Internals and Externals”
July 24th, 2007 at 7:37 am
Thank you Bob for offering this free information. I found the article refreshing and enlightening.
Keep up the good work.