Tuesday Update

The period of consolidation/trading range appears to be on weaker footing than strength. In particular, weakness in market breadth and advance/decline volume (as manifested in the McClellan Oscillator and its Summation Index) are troubling. Continued underperformance of financials and topping out in commodities provide additional signals that this rally needs a breather or a correction.

We are refraining from adding longs, continuing to sell covered and uncovered calls, and shorting select sectors. Oil (USO) appears to be topping out.

Unemployment Rate vs. S&P 500

Reprint of analysis completed in Q3 2008 forecasting the March 2009 bottom in the S&P500 and estimated timeline to recovery.

Click here for the report.

Weekend Update

Short-term, the odds favor a continuation of the uptrend. Major support holds for SPX and Nasdaq as the market bounces from an oversold condition. VIX failed its recent upward breakout as it drops below support. A move in VIX like this tends to presage continued market strength, although we need to be mindful of VIX getting too oversold (measured by the gap from its 50-day EMA). Nasdaq has once again outperformed SPX (a positive sign). Market breadth has been improving. Continued relative weakeness in financials and strength in durables are cause for concern for equities. Recent strength in the dollar seems to be waning, although commodities are weakening too. No major inflationary concerns are anticipated in the intermediate term.

Neutral-Bullish short-term; Bearish intermediate term.

Market Tour Update

Several indicators point toward continued weakness or continued sideways price action in equities. Breadth has continued to deteriorate and is not yet oversold (although the McClellan Oscilator is getting close), VIX wants to form a firm bottom near 30, and our simple Dow Theory non-confirmation continues (see our Market Tour on Stockcharts.com). Financial stocks have continued to underperform the averages, and Nasdaq has also begun to underperform as defensives (healthcare, staples) outperform. There are simply more negatives than positives at this time.

Visit Baseline Analytics' Market Tour on Stockcharts.com. Note that commentary and line studies use the following codes: green (bullish); red (bearish); black (neutral). Updated Tuesdays, Thursdays and on Weekends.

Weekend Update

The equity markets sit at an important juncture. Consolidation of recent gains have exhibited signs of divergence and deteriorating market breadth. Is it merely the summer doldrums or (as the Wave Theorists would argue) an impending correction? Since we don't trade in anticipation of a trend change (preferring instead to see price confirmation of a trend change), we will remain cautious. Longs have been hedged with covered calls and appropriate stops, and some index shorts (for an overall neutral stance). We will refrain from adding longs except for high-volume break-outs (select healthcare/pharmaceutical issues have shown recent signs of strength).

See our latest charts on Stockcharts.com

Current Market Tour

This bear market rally has a little more un-winding to complete before a potential short-term base is formed. Extreme overbought readings (especially stocks above their 50-day moving averages) require some time to settle back. Waning momentum, signs of divergence including Dow Theory non-confirmation provided clues to this retracement. We have been short SPY, QQQQ, RTH, long Dollar and FXY, and have sold calls on extended stocks. Staples and healthcare have shown strong basing and some breakouts. Volume on the downside has not been extreme, a positive sign. At this time (subject to change), we expect an orderly correction of the uptrend rather than a retest of the March lows.

Link to Market Tour on Stockcharts.com


Updated 06/18/09 market close.

COMMENTS AND SYMBOLS GUIDE: GREEN BULLISH, RED BEARISH, BLACK NEUTRAL.

Additional research at www.baselineanalytics.com.