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Ralph Bloch: Negative Non-confirmation, acDec10

Ralph Bloch’s Weekly Commentary

December 11, 2003

Negative Non-confirmation

Monday: 12/8
A higher opening of plus 28 at 10:00 a.m. was a bit of a surprise, what with futures being a bit lower. However, futures had closed on Friday at a premium, so it wasn't too bad. Prices held between 11:00 a.m. and 1:00 p.m. when they rallied to plus 65. At 3:00 p.m., they evidently picked up some programs to end 102 higher on very light volume of 1.18 billion. The DJI posted a new recovery high of 9965. NASDAQ, on the other hand, opened up 8-1/2 by 10:00 a.m. – spent from 11:00 a.m. to 3:00 p.m. in minus territory, until the last hour when it too lifted to finish up 11. The SOX closed flat, having been negative for most of the session. The financials strongly led the way with a gain of over 12 points – that's also good leadership beyond the SOX. Drugs acted o.k. (DRG 3 higher), and that's also a modest plus. The Advance-Decline index once again performed well, as it posted 1044 net positive and was net ahead 1118 at 10:00 a.m. with the DJI up 28 – it's nice to see the Advance-Decline acting well once again.

Last Monday (12/1) we outlined what most markets go through before a meaningful direction change. They generally go into a pattern of rally – selloff – rally, etc. This usually takes time. During such a period, we start to see momentum loss. That leads to one, two or even more non-confirmations by breadth and/or NASDAQ not confirming the DJI. We just had several days where breadth lagged a bit, as did NASDAQ, and that's the first time we've seen that in a while. The Advance-Decline caught up, but NASDAQ has not as yet done so. It ended yesterday at 1948, which is still 34 points from its prior high. This isn't a major non-confirmation (as yet), but it helps you understand what I was discussing in last Monday's special report. If the DJI works higher, it is important that NASDAQ play “catch-up” and confirm – that's very important, as a matter of fact! Today we deal with the FOMC meeting – what will he say? As of 6:30 a.m., futures are all above fair value – 10000?

Tuesday: 12/9
On the opening, the DJI hit 10003 intraday for about one minute as it brought sellers. By 10:00 a.m., the market lost nearly half its opening gain. From 11:00 a.m. to 2:00 p.m., the DJI was plus 3 to 15 points, waiting for the FOMC meeting. Nothing was changed (no big surprise), and once again, they sold into the news with the market finishing near its low – minus 42 on slightly increased volume of 1.4 billion. NASDAQ lagged from the opening bell to close down a whopping 40 points, along with a crushing loss of 20-1/2 points for the SOX – the BKX also got hurt by 12 points, as the leaders of the March-to-present rally (techs) are undergoing some real selling lately, as profits are being taken in growing size. The Advance-Decline index lost a bit more than it gained on Monday, and that's not good! There were 698 net negative for breadth. Also, the biotechs (BTK) fell 8 points. There probably is some tax selling at work, but no one can gauge just how heavy it might be.

What has gotten obvious lately is the relational aspects of the market. Out of the early big winners such as techs, financials, internet, biotechs, etc. into more defensive issues – GM is a recent leader. Let us repeat a few comments we've made in the past one-two months.

We've pointed out several times that additional supply exists from 10000 to 10700 – that's also being felt.
The negative non-confirmation recently set up between NASDAQ and the DJI – The former has not confirmed new highs posted last week by the latter. NASDAQ now is 75 points away from confirming, and that's a developing negative.
There is a chance that the DJI will try another rally shortly. If it makes another new high without NASDAQ and, this time, breadth – I'm selling stock into a lagging rally.
As of 6:30 a.m., futures are all below fair value.

Wednesday: 12/10
A plus opening of 18 points at 10:00 a.m. – minus 4 at 11:00 a.m. – back up a little until after 2:00 p.m. when prices began to fade to down 41, only to see a modest rally carry into the close to finish 1-1/2 lower on NYSE volume of 1.4 billion. IBM was higher by nearly 2 points at best and closed up 1.10, which was 8-1/4 DJI points. NASDAQ once again dogged it as it underperformed all session, finishing lower by 3 1/2 points. The Advance-Decline index also lagged all day to conclude with 742 net negative. The star of the day was the SOX, which rose nearly 6 points after getting hammered on Tuesday. The BKX fell 3, and the BTK was off 5-3/4. HD fell, and the disaster of the day was AZO, which really got clubbed with a final loss of 11, having been minus nearly 15 at worst. All-in-all, it could have been worse than it was, given the close.

Conclusion:
In yesterday's letter, we suggested that the market will try another rally shortly – maybe yesterday was a precursor to that rally, given the late rally and the SOX rising. If so, it becomes very critical that NASDAQ resumes its uptrend and posts new highs if the DJI does so. NASDAQ now needs to gain 86 points to accomplish this feat. Tough, but far from impossible. Also, and this is very important, the Advance-Decline index must be strong enough to fully support any moves by the DJI. I certainly don't want to see the Advance-Decline index not confirm potential new highs by the DJI – that would, I think, create a technical mess! Today, the market gets to see retail sales, which could be a market mover. As of 6:30 a.m., futures are all above fair value – we can get a glimpse this morning, at least, of what kind of technical breadth the market develops on a rally try at this point.

Ralph Bloch
Senior Vice President