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Amateur Investors Weekend Stock Market Analysis (3/12/10)

http://www.amateur-investor.net/Weekend_Market_Analysis_Mar_13_10.htm

The SPY ETF has been up "11" consecutive days in a row beginning in late February. Meanwhile the all time record since the SPY began trading in 1993 is "12" days in a row back in 1995.



The chart below is a daily chart of the SPY back in the Fall of 1995. After completing its 12th Day in a row to the upside this was followed by a rather choppy period from mid September through late October before it resumed its move higher in November. Thus the odds don't favor the market moving much higher from current levels in the near term.



Meanwhile another interesting feature has been the overall volume the past several months especially since last Fall. Those who have followed the market for a long time know generally it's bullish when volume is below normal on pullbacks and higher with the rallies. However since the Fall the exact opposite has been happening as the pullbacks have been accompanied by higher volume while the rallies have been occurring with below normal volume. (In the chart below I'm using a 20 Day Moving Average (MA) for volume with the daily difference plotted above or below the 20 Day MA (denoted by black line)). Notice the volume with the last pullback was very high while the latest rally's volume has been very low.



Meanwhile if we go back to 2007 the same type of pattern occurred right before the October 2007 top as a lot of volume occurred with the sell off from late July through August while volume was far less as the SPY made a slightly higher high by early October (point A). Now keep in mind this doesn't mean the market is going to go through a large sell off in the months ahead however the overall volume pattern in the market right now is somewhat concerning.



Finally after going through some data from the Flow of Funds which has released by the Federal Reserve on a Quarterly basis since 1952 there has been a strong correlation between Mutual Fund Selling and market bottoms. The chart below is what I call the Mutual Fund Panic Indicator which measures the amount of money being taken out of stocks by Mutual Funds. Like everyone else Mutual Fund Managers tend to panic near market bottoms as well. As shown below when Mutual Funds have decreased there assets in stocks by -20% or more (points B) since 1952 significant market bottoms have occurred ( Fall of 1962, Fall of 1970, Fall of 1974, Fall of 1987, Fall of 2002 and Spring of 2009). Also as you can see significant oversold rallies over a rather short period of time have also occurred which follows Newton's Third law of Motion "For every action there is an equal and opposite reaction".



Previous oversold rallies have ranged from 70% to as high as 97% after the Mutual Fund Panic Index has reached a value of -20 or below. Currently the Dow is up nearly 65% from its March 2009 low so this snapback rally is nothing unusual based on previous signals. Also just because the Dow could eventually rally 70% or more that doesn't mean the next great Secular Bull Market has begun. From the mid 1960's through the early 1980's there were two 70% or more rallies however the Dow basically went sideways for a period of 17 years.