Posted At : June 18, 2009 10:32 AM
For the first time since I went bullish on March 11, I am getting a little nervous. The market seems to be over the “It’s not the end of the world” rally, and looking for real evidence of a recovery. A lack of selling appears to be the primary factor in keeping this rally afloat. The lack of Demand behind the gains over the past month is very evident in the behavior of the Buying Power Index. Although the DJI, S&P 500 and NASDAQ Comp. Index were all at new rally highs late last week, the Buying Power Index was far from its high reading, at 172, recorded on May 8. In fact, with yesterday’s drop to 124, Buying Power is now at its lowest level since March 17 (at 121), just six days after the March 9 market low. That reading might not be a surprise if the market indexes had just suffered a significant decline. But, two days after the major price indexes were at new rally highs? Certainly, the market indexes can advance while Buying Power is dropping and Selling Pressure rising. (See, for instance, the rally from October 2005 to May 2006.) Historically, though, such rallies usually occur well after a bull market has become established, not in the first 2-3 months of advance after a market bottom. Consequently, the contraction in Demand does not appear to be offering an environment favorable for a new, major move to the upside by the price indexes. Thus far, the recent decline appears to be driven mainly by a lack of Demand rather than by heavy selling. For example, during Monday’s big sell-off Buying Power fell 9 points while Selling Pressure rose 7 points. This pattern remained intact during yesterday’s downside follow through, as the drop in Buying Power was twice the gain Selling Pressure. Specifically, Buying Power was down 4 points while Selling Pressure rose 2 points. If a combined 9 point increase in Selling Pressure can produce a 3.3% decline in the DJIA and 3.6% decline in the S&P 500 over the past two sessions, the market could experience a rather swift and protracted correction if Supply starts to grow. A further decline on continued increasing volume and a more pronounced expansion in Supply would tell me that the rally is over. The bottom line is the lack of a bounce following Monday’s 90% Downside Day on the NYSE calls into question whether the buy the dips mentality that has dominated throughout this 3-month long bear market rally remains alive and well.
Regards – Keith Springer