Technical Indicators turn positive—can it last?
Over the past three weeks, the equity markets have improved their positions and most technical indicators are positive again. The big question is whether or not this advance will continue or stall.
While there are still lots of negative economic fundamentals, recent days have also provided some positive reports. For example, the Labor Department Thursday reported that initial claims for unemployment insurance fell by 29,000 to a seasonally adjusted 469,000. While it is still a dismal number, at least it moved in the right direction this week. Also, the Commerce Department reported that retail sales rose in February by the largest amount since November 2007. Last week’s blog explained why the role of consumer spending is so important to economic recovery.
The chart below shows the performance of the S&P 500 Index over the past year. The gold line is a 50-day simple moving average (MA) of the index. The most recent correction sent the S&P 500 below the MA in mid-January. Over the past week, the index made a tentative move back above its MA.
One of the most basic indicators of an investment’s strength and momentum is whether it can trend above its 50-day MA. For most of the past year, the S&P 500 was easily able to do that. Right now it is barely above that mark. If it can move decisively above over the next week or two that should be viewed as a positive sign that the index can challenge its December 2009 highs.
The middle portion of the chart is a moving average convergence divergence (MACD). It turned upward a couple of weeks ago and is now right at the zero mark. The recent momentum is clearly upward. The slope of the MACD on this upward move is not nearly as steep as the moves we saw in March 2009 and July 2009. It is more comparable to the move of November 2009. That move produced several weeks of sideways consolidation before the S&P gained ground in December. It would not be surprising to see some consolidation at the current juncture.
The bottom portion of the chart is a stochastic oscillator. It is currently above 80 and rolling over. That is an overbought level and would normally indicate that some consolidation or correction is likely to follow.
The next few weeks are going to be important in helping us understand the near-term nature of major stock indices. If the indices can exceed their 2009 highs, then the bull rally of 2009 is likely to gain strength and continue moving upward. If the rally falters and the old high is not broken, then stocks could begin another bear phase.
F.S.