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After Six Up Weeks In A Row ...04/20/09 09:33:22 AM
by Mike Carr, CMT
The broad market has been up six weeks in a row. We look at what happens after a run like that and discover it's bearish and bullish.
Security: $XVG, RSP
|Looking at the Value Line Index, stocks closed with their sixth consecutive week of gains. The Standard & Poor's 500 only shows five weeks of gains, but the Value Line provides a better measure of what the average stock is doing because it is a very broad, equal-weighted index. Figure 1 shows the relative strength of the S&P 500 against its equal-weighted counterpart, measured by the RSP, an exchange traded fund (ETF) that tracks the equal-weighted index. When RSP is doing better, the average stock is outperforming the S&P 500.|
|FIGURE 1: RSP, DAILY. From this chart, we can see that the relative strength of the equal-weighted index is greater than the S&P 500, indicating that small-cap stocks are outpacing large-cap stocks.|
|Graphic provided by: Trade Navigator.|
|The Value Line has closed up six straight weeks 15 times since 1993, an average of almost once a year. It has been up seven consecutive weeks on six occasions. The longest streak is 10 weeks. So this recent behavior is unusual, but certainly not unprecedented.|
|After being up six weeks in a row, the chance that the index will close higher one week later is 40%, less than average. Two weeks later, the average closed higher 54.5% of the time, about average. Three weeks later, the odds of an up close were only 36.4%, indicating that a pullback is likely from current levels. However, a month later, the market was higher 70% of the time.|
|These odds offer insight into what to expect in the coming weeks. They may help traders assess whether we are in a bear market rally or have begun a new bull market. If it's a new bull, we should be higher four weeks from now.|
Mike Carr, CMT
Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."
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Date: 04/20/09Rank: 1Comment: