Tuesday, May 13, 2008

Divergence in the Indexes

Top Line: Our thought on the market is that we are in a rare technical position (see our last post) that should lead to a dramatic drop in prices. These may be the best prices for the rest of the year.

One of the market's biggest problems at the moment is the volume. Yes, the market recovered much of today's early decline but this heroic effort was done on low volume. For most of this rally off the lows of March the volume has been anemic. Maybe it's just spring fever?

We are going to stay with our analysis of the current position of the market. To continue with the reasoning from our last post, the probability is high that the market is heading down due to the flattened 200 day moving average. But, not all the signs are bearish, at least not yet. The market always needs to keep people guessing, as long as possible.

The main problems with our theory rests in the divergence of the NASDAQ indexes and the Dow and SP500. In the past few weeks the Dow has sunk from the recent highs around 13,100 to the 12,750 level. At the same time the NDX, the NASDAQ 100, our favorite index, has managed to put up a higher close. The divergence is important because of the more speculative juices exhibited over in the NASDAQ. You know about our own index, the FSI, and how it is telling us that the rally may well be over. Yes, you have to listen carefully, we know...

The divergence is probably just a distraction but since it is out in the open, we are going to watch this closely. We would say that the market has tried to extend the rally but it is labored at best. The week should provide some additional clues. This week is options expiration and may find a reason to trade down based on that alone. Otherwise, there are some news items that could make a difference but we don't think so. The market is pretending to be bulletproof at the moment. That should change very shortly.

FSI: 95.98 (just a little bit of slippage)

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