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Monday, February 23, 2009

Notes from TechTalk: A Bottom to the Endless Pit?

Don Vialoux is a Chartered Market Technician who runs TimingTheMarket.ca. He received an interesting question on his daily blog.

From http://www.timingthemarket.ca/techtalk/2009/02/23/tech-talk-for-monday-february-23rd-2009/

Question from Mike:
So it looks like the DOW will break the inter-day low set in November, a new low. I was wondering how does volume come into play in defining a bottom? I believe Don mentioned that the official “bottom” was set in October when the volume reached 10 Billion shares on the S&P. I am confused with all these bottoms, the market keeps sinking. Can anyone present some clarity?

Hi Mike from Winnipeg:
A lot depends on the benchmark that is used when looking at a market. For example, an overview of all stocks listed on U.S. exchanges indicates that most stocks hit their low on October 10th.

The Wilshire 5000 Index and the Russell 3000 Index (i.e. indices based on stocks that are part of the broadly based U.S. equities market) reached their low on November 20th. The S&P 500 Index, an index that tracks 500 big cap stocks in the U.S. reached a low on November 20th.

The Dow Jones Industrial Average, an index that tracks 30 of the largest U.S. based companies in the world broke to an inter-day low on Friday. Of all the indices, the Dow Jones Industrial Average as a price weighted index is the least reliable benchmark: It is narrowly focused and its computation leaves much to be desired. For example, if Citigroup doubled, it would have the same impact on the Average as 2.5% increase in IBM.

The top 10 high priced stocks in the Dow dominate the performance of the Average. Performance of the top 10 Dow Industrial stocks is not a very good benchmark for the U.S. equity market.

Why mention the Dow Jones Industrial Average in Tech Talk reports? Because it’s the most frequently quoted benchmark quoted by the media.


Don also commented on the credit freeze. Investors can watch bank stocks rise and fall, but the two figures he mentioned are all that matter right now:

No progress was made last week to alleviate the U.S. credit freeze
  • The yields on one month, three month, two year, five year, ten year and thirty year treasuries were virtually unchanged
  • The TED spread and LIBOR were virtually unchanged.
Don's Market Summary:

Chances of a recover by North American equity markets into spring from current oversold levels are good. However, upside potential probably is limited to highs reached early in January. Ultimately, the next upside move into spring will prove to be a rally in a bear market. Selected sectors with favourable technical, fundamental and seasonal prospects remain attractive.

Full Article here: http://www.timingthemarket.ca/techtalk/2009/02/23/tech-talk-for-monday-february-23rd-2009/
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