Bullish resiliance

Although equities appear to flip direction from one day to the next, internal indicators and sentiment are beginning to put a drag on the uptrend. Whether the current consolidation represents a healthy pullback or something more ominous may be signaled by our McClellan Oscillator indicator.

At this time (prior to Tuesday's close), our reading on NYMO (NYSE McClellan Oscillator) is showing signs of weakness (see chart below). It's close fell below its EMA 20 (whipsawing lately) and the NYSI (a cumulative view of the index) fell below its EMA 20 about 10 days ago.  In addition, NYSI is close to a "bear market" reading (400 and lower) with its Monday close at 466.

On the positive side, major indices continue to sport uptrends. The Put/Call ratio at 1.13 is mildly bullish (in a contrary sense).  Discretionary stocks continue to outperform Staples, and even Finance stocks have seen a bid and some improved relative strength.  Small caps and growth issues continue to lead.

It is interesting to note the relationship between the LQD (Corporate bond ETF) and the Barlays 7-10 Year Teasury Bond, IEF, versus the S&P500.  As the S&P500 has risen since September, the LQD/IEF ratio has remained flat. This ratio tends to lead the S&P500. A flat ratio, however, is not bad for equities. For example, from July 2006-October 2007, this ratio was essentially flat as the SPX rose 14%. A decline in the ratio is worrisome, as it led the SPX by 6 months from July 2007 when it broke support, before the SPX broke support (See chart below).  We will be on the lookout for a decline in this ratio as a bad omen for equities.

As equities consolidate and vary within a trading range, we will look for any volume upticks on an up-day to support adding to long positions, as long as our indicators continue to remain (albeit modestly) on a buy signal.

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