Stock Market Crash Course: All Systems Go - Cabot Wealth Network

Stock Market Crash Course: All Systems Go

In today’s Stock Market Crash Course, we look at the market’s technical health to see if the QE3 spike can be sustained. Experts quoted include John Bollinger, Clif Droke and Dr. Marvin Appel and Gerald Appel. Click below to watch the video.

Chloe Lutts, Editor of Dick Davis Investment Digest and Dick Davis Dividend Digest

Chloe Lutts is the editor of Dick Davis Investment Digest and Dick Davis Dividend Digest, and the third generation of the Lutts family to join the family business. For each Digest, Chloe reads hundreds of investment newsletters to select the strongest ideas for her readers. Prior to joining the Dick Davis Digests, Chloe was a financial reporter for Debtwire, a division of the Financial Times, covering fixed income, and before that, she reported on global debt markets for Institutional Investor. She also has previous experience at Cabot, writing about growing momentum stocks for Cabot Top Ten Trader and high-potential small companies for Cabot Small-Cap Confidential. She holds a B.A. in International Relations from Brown University, and also studied in Beijing and Paris.

[Transcript] 

The main focus this week has been on policy issues affecting the stock market, from the German court’s bailout ruling to yesterday’s QE3 announcement from the Fed. Yesterday’s Fed announcement was obviously the biggest news, sending the broad markets significantly higher. But I don’t like to focus too closely on the news here, so we’re going to take a slightly longer view and look at the technical patterns developing in the market over the past couple weeks, and what yesterday’s spike could mean in that context.

The situation coming into this week was summed up nicely in John Bollinger’s Capital Growth Letter, Monday. He wrote:

“Friday turned last week into a pretty big week for stocks with some important breakouts, but not a lot of confirmation. However, both the daily and weekly versions of the NYSE Advance – Decline Line recorded new highs last week, a factor that suggests that the market is still internally strong. We still remain constructive on stocks, but note that risk and uncertainty remain high. One of the things I worried about was a lack of new highs, but Thursday and Friday’s strength carried NYSE new highs to a six-month high. Color me cautiously long, with an eye out for trouble.”

Clif Droke, Editor of Momentum Strategies Report, noted a continuing positive trend in the advance-decline line this week, writing on Thursday:

“The NYSE Advance-Decline Line has made a new high as of Wednesday. This tends to precede higher highs in the major indices.

“Meanwhile the NYSE 52-week new high-new lows continue to show demand for stocks on an incremental basis. The number of stocks making new highs has been expanding of late while the new lows have kept well below 20. This shows that there are no internal selling pressures, at least on an immediate basis.

“The continued strength reflected in the daily new highs-new lows has also filtered into the Hi-Lo Momentum Indicator series known as HILMO. All eight of the internal momentum indicators are currently rising with six of the eight indicators confirming the recent new high in the S&P 500. An example of the strength of the dominant intermediate-term internal momentum indicators is shown below.

“Until at least the short-term HILMO indicators reverse their upward trend the path of least resistance remains up for the broad market.”

So with all those indicators looking strong, I don’t see any reason why Thursday’s spike shouldn’t be confirmed and extended in the days ahead.

Our final technical indicator today comes from Dr. Marvin Appel and Gerald Appel, Systems & Forecasts, who wrote a piece earlier this week under the headline: “Small cap resurgence is a bullish indicator.” They looked at a small cap index, the Russell 2000, and compared it to the S&P to get an idea of how aggressive or bullish investors are feeling. In this top chart here they’ve plotted the strength of the Russell 2000 represented by the iShares Russell 2000 Index fund, IWM, against the S&P 500, represented by the S&P 500 SPDR, SPY. Here’s their analysis of the chart:

“The Russell 2000 Index was a leader of the market advance during the first quarter of the year. However, from the end of March through July, IWM lagged the S&P 500 in relative strength. …

“The good news is the change in relative strength in IWM which started at the beginning of August has now begun to favor IWM for the first time in four months. The ratio of IWM / SPY is rising and making a series of higher highs and higher lows, forming an uptrend from the bottom of the range that has been in effect since August, 2010. Bottoms in the relative strength ratio IWM/SPY have corresponded with tradeable rallies in IWM on three previous occasions: October 2009, August 2010 and October 2011.

So the relative strength of small caps here is definitely a bullish sign. The Appels conclude:

“To sum up … Prices are holding steady, and volume patterns that I follow are moving into a buy zone where good buying opportunities develop. I therefore recommend giving the market the benefit of the doubt even though we are entering the September-October period where historically the market has had some sharp moves to the downside.”

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