Complacency seems to be creeping back into the equity markets once again. For the average investor, it may seem like being in a “house of mirrors” within some scary reality show!

 

For now, however, the U.S. has become the beneficiary of Europe’s woes and has once again regained the torch for being the “least worst” place to invest capital!! Yes, this might be a short-term phenomenon and yes we certainly have our own mountain of financial, economic and political problems that must be addressed. However, for now the U.S. is reaping the benefits of once again being the harbinger of “safety”. 

 

After a vicious and massive sell-off last week, the equity markets have rebounded significantly (over 100 points on the SPX from the intra-day trading low set on May 6^th, 2010). Are the markets as “healthy” as one might think given this week’s impressive market rally? Perhaps…but not likely. After turning decisively negative (absolute SELL signals) in late April, our propriety short-term momentum indicators and oscillators remain “bearish” at this time. 

 

From a technical perspective, the markets were technically “broken” after last week’s massive plunge.  By “broken”, we simply mean that the major averages violated significant support levels (such as the 200-Day Simple Moving Average) and did so quit decisively (on large sell volume). Even with this week’s move, the SPX remains below it’s 21-Day EMA (exponential moving average) and it’s 50-Day SMA. As we mentioned earlier this week, we continue to believe that the SPX will incur significant resistance at the 1175 level. Although breadth has been positive, relative strength and momentum has not been and remains “unimpressive” given the point gain move realized off last Wednesday’s market bottom.

 

Even with this week’s “bullish” tone, volume has once again reverted back to lackluster levels. Volatility, although still well off the “extreme complacency” lows seen in April 2010, has decreased nearly 40% from last Wednesday’s market plunge. As we have mentioned repeatedly over the months, we view the low levels of volatility and trading volumes are “bearish”, not “bullish”.

 

Again, we continue to see unimpressive trading volume with continued consolidation, or trading volume, in a narrow band of “select” stocks within certain “darling” market sectors. In other words, this latest market advance lacks “buying conviction” (low trading volume) and has not been broad based in nature (a healthy bull market is typically very inclusive across the majority of equities and sectors). Beyond “Price Action”, we place a great deal of emphasis on our volume and breadth (advance/decline) charting and forecasting. Our propriety volume and breadth models have been extremely revealing and reliable in forecasting future market behavior (leading indicators). Although “Price Action” can often be very “apparent” when reviewing charts, the “under currents” for the market are not always as “obvious” or visible. Often, correctly identifying these “under currents” will reveal future movements, momentum changes and reversals before any “Price Action” confirmation. Low trading volumes, volume consolidations (a majority of the volume in a few select stocks/sectors), and breadth trending have all been confirming an impending downturn in the equity markets.