Technical talk: Buying power not tapped out yet

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The comments below were provided by Kevin Lane of Fusion IQ.

Another stellar day for the markets on Thursday as up to down volume ratios on the NASDAQ and NYSE were 12.36 to 1 and 14.78 to 1 respectively, while their advance to decline ratios were also correspondingly bullish at 5.10 to 1 and 7.28 to 1 respectively. We always say these metrics are the best gauges of confidence and conviction behind the markets move and help to better handicap a rally’s likely staying power as it reflects more participation and commitment by the market largest aggregate buyers – institutions.

When a market is up but these metrics aren’t as positively skewed it is typically more a sign of short covering, which is not a long lasting liquidity event (buying) to drive stocks markedly higher. However, days with internal readings like Thursday’s or the ones we highlighted back in early March (when the index was about 17% lower), are signs of significant buying and commitment which suggest a good (i.e. durable) rally is at hand.

For the last few days we have been saying the obvious and easy call was to say the market would stall as the S&P 500 approached resistance. From a common sense as well as a technical perspective even we had to respect that this resistance may be a factor after a 26% gain from the lows.

Playing devil’s advocate in our head and knowing nothing is certain or has to act a certain way we did hold out an alternative and equally likely thesis – a continuation of the rally. We also suggested several blueprints on how to navigate this call of stall or rally. We suggested that being prepared and then executing a game plan makes one less emotional and makes for better results. Along the vein of being open to the idea that the game changes constantly and like a good coach, a trader/investor needs to adapt (or change) their game plan as new wrinkles occur. In this case the wrinkle was that the market could possibly move higher and evidence was growing to suggest that.

That evidence we suggested that was altering the original game plan of a likely stall near 850 (after we suggested investor buy just above S&P 500 at 700) was growing anecdotal observations of everyone echoing disbelief in this rally’s staying power. We suggested it was pervasive and growing louder and as more and more naysayers and doubters said things such as: “I am in cash and can sleep.” or my favourite: “I am not worried that I am missing this up move it’s not a real move.” Pardon my naiveté (lol!), but the last time I checked a 26% rally in several weeks is pretty damn real.

Hearing those “safe in cash” comments now, not after the first 20% or 30% correction but after a 50% correction from the peak and then adding to the equation negative sentiment towards equities, individual investors and fund managers with lots of cash on the sidelines, a ton of bad news discounted into prices and a global push to aggressively stimulate, made for a pretty compelling backdrop to buy stocks (if not for the long haul at least for a good cyclical rally).

As further supportive evidence to a rally extension theme being likely, on Thursday we highlighted that sentiment had not become excessively bullish yet (typically a rally killer), even after the aggressive move off the lows. Therefore we suggested stocks weren’t in danger because liquidity (buying power) was not tapped out yet. Techs, high beta and growth style investing outpaced the market for the duration of the rally and continue to be the place and style bias producing the best returns.

Source: Kevin Lane, Fusion IQ, April 13, 2009.

 

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