Market Briefs & Sentiment Outlook (MBSO)
Reported by Tony Carrion

http://www.market-harmonics.com

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June 7, 2009

Stock Market Outlook for June 2009

The pullback discussed in May didn't amount to much, barely giving up 6% of gains in the Dow Jones U.S. Total Stock Market Index (DWC) before making new recovery highs on June 2nd.  While stocks retain the right to push further towards new recovery highs, the lack of any substantive pullback since the start of the rally in early March still, we believe, argues for some caution.

The Elliott Wave pattern in the DWC tells a bit of cautionary tale, as it remains internally corrective, and thus in keeping with what we'd expect for a corrective advance.  It is a powerful one, to be sure, having gained more than 43% at this point, but it nevertheless is counted as a strong bear rally.  Our presumption when the 5-waves down from the October 2007 highs completed in March was that a strong 3-wave rally would ensure to retrace at least 38.2% of the decline.  In the DWC, this level lies at 10273, some 600 points from the June 5th close.  We should also note that a resistance range lies between this and the 9800 area, and so we regard the advance as having reached its maturing stages.

We'd also noted that market sentiment was likely to get fairly optimistic and complacent, with the evolving belief that a new bull market had been launched.  Indeed, the steady decline in the VIX suggests that the comfort level has been increasing with the idea that the March lows signaled the end.  This is not our view, of course, as expressed in our monthly comments since the March low was made.  Valuations, as we've noted, were much improved, but on a historical PE basis in the S&P 500, the quick turnaround pre-empted the achievement of valuation lows that were consistent with past secular bear market bottoms.  

Perhaps one of the more discomforting bits of data that shows how long in the tooth this rally has gotten is revealed by Accumulation/Distribution trends since the start of the rally in early March.

The top reading (at weekly scale) not only shows massive stock accumulation since the March bottom, it also shows that levels of accumulation have exceeded those achieved at the bull market top in October 2007.  It also shows that levels of distribution were still moderate even during the intensive period of selling between last September through March.  Below the Accumulation/Distribution indicator is the Chaikin Oscillator, which monitors the flow of money in and out of the market. It is basically an MACD indicator used to predict changes in the Accumulation/Distribution Line, and helps in identifying when changes in accumulation or distribution trends may occur.  As we see in both indicators, extreme trough to peak readings have occurred in barely over two months, which is rare, if not unprecedented.  Naturally, extreme readings in any market indicator always grab our attention.  

Volume trends certainly give us another window on underlying market sentiment, and as we also note with respect to the NYSE Advance/Decline line, and despite the intensity of selling prior to the March lows, the difference between advancing against declining issues barely approached the low levels seen in 2001-2002.  The presumption, of course, is that the A/D Line still will by the time the secular bear market lows have been made.  In all, volume data appears to be telling us that the bull camp is getting a bit overcrowded, and uncomfortably over-committed.  We continue to urge caution and defensiveness when playing the long side of the market.

For regular, ongoing commentary on the Elliott Wave trends in all the major markets, be sure to visit our good friends at Elliott Wave International.

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