Temporarily the market is extended and may correct or base for a few weeks

Market is in weak uptrend. The table below shows the gains (since their buy signal) made by the indexes shown on the left side. We are calling the market to be in a weak uptrend because the price gains are not “stellar” from their buy signal.

  

The Market Breadth Ratios are giving good readings for an uptrend. However the market is temporarily extended and may correct or base for a few weeks. This is what we call a countertrend, the primary trend being up right now. Read the blog of Sept 10, 2012 to get a detailed picture of what is working in the “Current market environment”.

Sectors working in the current market environment

The sectors working in the current market environment are precious metals (gold and silver), energy (Oil & gas drilling and exploration), banks, financial, home builders, retail and consumer discretionary. See the chart below.

A few Growth Momentum Leaders are working but as an asset class this group is still in trouble.

Stock categories like “Small Cap Companies (IWM)”, and “Overall U.S. economy (SPY)”  are working due to the valuation play. Companies have a lot of cash on their balance sheet, so at their current stock price they are attractive from a value standpoint.

“Hi Yield junk bonds” are working because of their high yields. Here again we see a value/income play.

“Gold” is working because of monetary easing by central banks all over the world.

“Growth Momentum Leaders" as a group is still in trouble though a few select stocks in this category are working. We need to wait for growth in the economy for this class of stocks to start working again.

“Treasury Bonds” are not working because the market considers them to be extended in price, currently.

Market Breadth Ratios are giving very good readings

Market Breadth Ratios are giving very good readings. This means most of the stocks are participating in the rally and we should be invested in the market. However we did not get a reading over 500 in the “4% up” column, even after the Fed's announcement of QE3. This means we may not have an explosive rally to the upside.

The areas which are working are those providing decent dividend yields, interest yields and those benefiting from monetary easing by central banks worldwide. Read the blog of Sept 10, 2012 to get a detailed picture of what is working in the “Current market environment”.

Market Breadth Ratios have turned positive

Market Breadth Ratios have turned positive.  This means most of the stocks are participating in the rally. We did not get any number more than 500 in the “4% up” column, which is why we cannot say that it is an explosive rally to the upside.

However this rally is worth participating in. Read the blog of Sept 10, 2012 to see which areas of the market are working.

Current market environment

What is working in the current market environment:
1.       Small Cap Companies (IWM)

      2.      Overall U.S. economy (SPY)

      3.      Hi Yield junk bonds (JNK)

      4.     Gold (GLD)

What is not working in the current market environment:

      1.       Growth Momentum Leaders  

      2.      Treasury Bonds (TLT)

Stock categories like “Small Cap Companies (IWM)”, and “Overall U.S. economy (SPY)”  are working due to the valuation play. Companies have a lot of cash on their balance sheet, so at their current stock price they are attractive from a value standpoint.

“Hi Yield junk bonds” are working because of their high yields. Here again we see a value/income play.

“Gold” is working because of monetary easing by central banks all over the world.

“Growth Momentum Leaders" are not working currently and have not been working for sometime because there is no growth in the economy. We need to wait for growth in the economy so some new “leadership” starts to show in this area.

“Treasury Bonds” are not working because the market considers them to be extended in price, currently.

The numbers in Market Breadth Ratios are also starting to improve

Small capitalization stocks did well today. This is shown by the chart for IWM (the ETF for Russell 2000, representing the small cap universe). There was an “up thrust” in price on high volume. This means money is moving into this category of stocks.

The numbers in Market Breadth Ratios are also starting to improve.

These are early indicators to show the Market may be setting up for Momentum Growth Stocks category to start performing. We need to watch the market to see if these early indicators stay on track or fizzle out.