Saturday, May 29, 2010

Charts of the Über-Indicator and its components

The Ü-I notched another gain on Friday. That makes six daily advances in a row.

The improvement in the Ü-I Friday can be attributed to a continued normalization of the Relative Volatility Index. The RVI is still above neutral (1.00) but the direction of the index is encouraging. Be aware, however, the RVI is rather sensitive, and one or two days of high volatility can push it right back up to panicky levels.

Below is the nine day moving average (geometric) of the Breadthalyzer. The daily swings in the Breadthalyzer can be infinitely volatile, so it is necessary to smooth out the daily fluctuations with a geometric mean. I use the 16 day geomean of the Breadthalyzer in my Ü-I calculation, but when analyzing the Breadthalyzer itself it's good to look at a variety of moving averages. The nine day below is fairly representative of the rebound in breadth within the S&P 500 index recently.

While it too has stabilized over the past several sessions, the S&P 500 Momentum Index remains in negative territory:

Summary: I have made it clear over the past week or so that I expect a rebound in the stock market. My indicators continue to lend credence to that view. However, the indicators are still, for the most part, in bearish territory. My positive outlook for the market is based on the relative improvement of the indicators coming out of the rather bearish turn the market took over the last several weeks. With that in mind, adopting a bullish stance on the market now may be jumping the gun. One might wait for the Ü-I to recapture a positive level (e.g. > 1.00) as confirmation that a meaningful advance is in store. Of course by then, who knows how much of a rally one will have missed out on.

But as you know, I am bearish over a longer-term horizon. Any rebound that develops this summer should be sold. The questions are when and from what level. Hopefully our indicators and intuitions can help us time the next selling opportunity.