Little cause for concern

Leon Tuey's TSE Momentum Index did its job once again to maintain its flawless track record. As I mentioned in the last article, the Index stood at -16.4% at the end of August, thus having fulfilled the first requirement that the TSE 300 be down 10% or more on a year-over-year basis. The second requirement was the waiting period of two months before making purchases. That was fulfilled at the end of October. To add to the bullish scenario, the volume lines of TSE 300, NYSE, and Nasdaq all gave buy signals in October.

Having rallied from extremely oversold readings last August, some of the indicators are now over-bought. In New York, the 5-week A-D Ratio has been in the sixties for the past three weeks, reaching a high of 65.4% for the week ending November 13. The normal range for this indicator is from 42% (over-sold) to 58% (over-bought).

The percentage of stocks above their 10-week moving averages has been in the seventies for the past four weeks, reaching a high of 78.8% for the week ending November 13 and pulling back to 73.4% the following week. When this indicator rallies above 70% and then drops back below 70%, a shortterm sell signal is given.

Most worrisome is the fact that the Bullish Advisory Services have been above 55% for the past two weeks. In Toronto, the 5-week A-D Ratio was over-bought for the week ending November 13 at 59.5%. Stocks above their 10-week moving averages only made it as high as 68.1% but that indicator rarely exceeds 70%, so it's close enough to be over-bought on a shortterm basis. Overall, there is a strong likelihood of a short-term pull-back in the near future.

THE LONG TERM VIEW

I don't think we have much to worry about yet. November to April is traditionally the best time to be in the market. The volume lines of the Dow Industrials, NYSE, and Nasdaq are all at new highs, so there's no possibility of sell signals. The volume lines for the four TSE indexes are all leading on the upside and will, in all likelihood, reach new highs before the indexes do, so the possibility of sell signals is remote. And the percent of stocks above their 30week moving averages is only 45.4% in New York and 31.0% in Toronto. The same rule applies to the 30-weeks as to the 10s. They must exceed 70% and drop back below 70% to give a sell signal. They're a long way from that at the moment.

Now, I want to look at the Dow Utilities and the U.S. Bond market for a moment because when they get into trouble, the stock markets are usually not far behind. I've included charts on the next page for both. (The Bonds are futures. You can't get high, low, close and volume for the bonds themselves. Nevertheless, the futures tell the story.)

Note that the Utilities are almost back to a new high while the volume line looks like it won't confirm. If it doesn't, we'll have a sell signal. Trouble for the Utilities usually means trouble for the Bonds. The high for the Bonds was back in the first week of October. It was confirmed by the volume line. Then there was a pull-back with the price declining almost to its 30-week moving average. But the volume line took a dive below its 30-week moving average and has been behaving worse than the price ever since. Since the last high was confirmed, the price should exceed it but it is unlikely that the volume line will. That means a sell signal. While all this is speculation at the moment, I think the patterns are sufficiently weak to be a cause for concern. If they develop the way I think they may, then we will have to cast a wary eye upon the stock markets.

PATRICK TAYLOR IS AN INDEPENDENT

TECHNICAL ANALYST

Copyright Canadian Shareowner Magazine Inc. Jan/Feb 1999
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