A Must-See Chart With a Warning Sign

March may have come in like a lamb and gone out like a lamb, but in between, the bulls and bears had a real donnybrook, much as is depicted in the famous painting “Bulls and Bears on Wall Street.”

And so, the wild month of March closed 2.2% higher and Q1 gained just over 5%. The last day of the quarter was quiet as investors pondered the meaning of slightly more jobless claims than expected along with a minor drop in factory orders. But what killed the rally was a statement from one Fed governor that indicated a need to raise interest rates by 75 basis points late this year.

Daily Stock Market News

Dow: -31 points at 12,320
S&P 500: -2 points at 1,326
Nasdaq: +4 points at 2,781

Volume and Breadth

NYSE: 918 million shares traded; advancers ahead 1.1-to-1
Nasdaq: 530 million shares traded; advancers ahead 1.4-to-1

Futures and Related ETFs

May Crude Oil: +$2.45 at $106.72 per barrel; Energy Select Sector SPDR (NYSE: XLE) -26 cents at $79.75
April Gold: +$15.10 at $1,438.90 per ounce; PHLX Gold/Silver Sector Index (NASDAQ: XAU) +1.58 points at 216.74

What the Markets Are Saying

On Fridays, we typically review our internal and sentiment indicators for any hints of the future direction of the markets.

The Association of Individual Investors (AAII) yesterday said that bulls increased by 4.1% at 41.8%, while bears declined 3.9% to 31.1%. This places the bullish reading over the long-term average of 31% for the first time since Feb. 17. The other sentiment number that we watch is published by Investors Intelligence, which reported that after a month of steady declines, bulls increased to 51.6% — up a full percentage point in one week, but still lower than the dangerous levels of 58.8% in mid-December, and 56% in mid-January.

Since both sources for our sentiment readings are “contra indicators,” the conclusion confirms our internal indicators. The market is moderately “overbought” and due for a correction.

In yesterday’s Daily Market Outlook, we discussed the “deep ‘V’ top” chart formation and the possibility of a deeper correction if the bulls are not able to drive through the highs of mid-February on an increase in volume. The spread between current price and the 12-month moving average should also alert us to the possibility of a correction.

Our regular readers will recognize this 14-year chart of the S&P 500 12-month moving average. It’s a terrific indicator of change of trend. Note the signals when the blue price line crosses the red 12-month moving average. But it also illustrates the vulnerability of markets to corrections when prices run too far above their 12-month moving averages.

S&P 500 Chart

Note the false “sell-buy-sell” signals of April through August of last year, which resulted from just such a wide spread. On the April 30 peak, the spread was 12.2%. That led to the sudden decline and stalemate that was with us for four months. The spread is now at 12.3%.

Conclusion: The high volatility of last month has driven prices far above the 12-month and 200-day moving averages, and chart formations like the deep ‘V’ top are warning us to be very cautious bulls.

For one way to play a reversal, see the Trade of the Day.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.

Article printed from InvestorPlace Media, https://investorplace.com/2011/04/daily-stock-market-news-a-must-see-chart-with-a-warning-sign/.

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