Market Commentary

Over the weekend, the G-20 nations pledged cheap money will continue until a recovery is reassured.

This certainly affected the markets. The US dollar plunged, commodities soared and with it the DOW 30 set a new yearly high, up over 200 points.

So why do we need the G-20 nations making this pledge? Aren’t we in recovery? Isn’t the GDP in positive territory? So why does the G-20 need to reassure the world, unless the world just doesn’t believe the “recovery” mantra.

This isn’t about pledging cheap money until a recovery is reassured. This is about national debts so high that countries can’t afford to pay higher interest rates.

As I have been expecting, the stock market has staged a short cycle advance, but I have to tell you I am not at all impressed with it, especially in the small cap stocks, which are lagging badly.

What we are seeing is a sector rotation out of growth related stocks into the largest companies, into the bluest of the blue chip stocks, the Dow stocks – for liquidity and defense. When you see this kind of market action it is disconcerting as it often a sign of a major market topping pattern.

For example, the RSI value for the Russell 2000 is the weakest of all the market indexes at 50, with the DOW 30 being the strongest at 63.

This is what I saw back in October of 2007. Both the Dow 30 and the S&P 500 index had just made a new high for the year, giving a false sense of security for investors, but market breadth was breaking down and had been deteriorating since August, similar to what we are seeing this year.

As happened in 2007, we are now seeing a huge sector rotation out of small cap stocks towards the largest and the most liquid stocks. And that isn’t what we want to see. It signals the durability of a lasting primary trend is coming to an end.

Clearly, risk takers are growing alarmed on a technical basis.
For example, let’s look at advance/decline line make up of the McClellan Oscillator and McClellan Summation Index.

As I pointed out last week, I expected to see another short cycle advance. But this advance is now close to being played out now as reflected in the McClellan Oscillator.

Notice the pattern of lower lows and lower highs on the OTC McClellan Oscillator and that it is now at the top of the range again. While it could go a bit higher, this is a bearish pattern and reveals technical deterioration despite the DOW making a new high for the year. The very fact that the DOW makes a new high while small and mid caps remain far behind in performance just confirms the weakness.

As you can see from the McClellan Summation Index we have no sign of a bottom and with the McClellan Oscillator nearing an overbought condition again, we aren’t likely to see the Summation Index reach a bottom even on the next short cycle correction.

Taken together, this reveals that market risk is very dangerous right now. With the McClellan Summation Index at -337, the OTC is technically breaking down and the technical underpinnings aren’t strong enough to hold the bull market in the OTC, suggesting a bear market is a real potential.

that you remain neutral in your portfolio positions. Market risk has now elevated to a dangerous level.

For those of you who remember in 2007, the new lows vs. new highs indicator against a 10-day moving average.

Notice, this indicator is starting to get into trouble for the month of November, 2009, warning of weakness in the OTC index – just as it did in 2007.

This doesn’t mean the stock market cannot reverse this weakness and strengthen before the end of the year, but what it does signal is that the market is weakening and losing market leadership to the blue chip stocks.

Remain neutral – this is one dangerous market.