Market update - looking worse

I have a lot of respect for Brian Shannon and I have learned a lot over the years by listening to his videos and reading his blog. Though I try to focus my blog on finding high-potential stocks from among the all-time high list, it is important to stay in tune with the markets as a whole because no stock exists in a vacuum. So that is why I assemble a weekly 'market update' post - it helps me listen. Here's a quote from Brian Shannon that I've always liked:

"Our job as traders is to objectively listen to the message of the market and then place reasonalble sized bets relative to our account size and then manage risk. In theory, trading is so simple, but in practice we become our own worst enemies."

- Brian Shannon, Alphatrends.net blog post in 2006

For starters, what are the broad markets saying?

All of the Indexes I scanned are in short-term and medium-term downtrends as indicated by the slope of the 20, 50, and 200-day moving averages. I include both simple and exponential averages for the longest timeframe because there can be substantial differences between the two and the exponential averaging is more sensitive to recent price action. Particularly interesting is that the 50-day switched from up to down on two indexes. The North American markets still have upward sloping 200-day simple moving averages (SMA) but the downturn is showing up on the exponential moving averages of SPY and EWC. Foreign markets are firmly in a downtrend on all timeframes and EFA (chart below) is looking horrible. This evidence shows that all markets are weak, some are getting weaker, and none are getting stronger. Will the US get pulled down by foreign markets or will it act as a safe haven? Time will tell.

Trend Direction on Multiple Timeframes for Several Indices 01-Jun-2010 vs. 17-May-2010 ALL CAPS = the current trend, (small letters) = the trend 10-days ago
Index	Slope of 20-day SMA	Slope of 50-day SMA	Slope of 200-day SMA	Slope of 200-day EMA
QQQQ Nasdaq	DOWN (down)	DOWN (up)	UP (up)	UP (up)
SPY S&P500	DOWN (down)	DOWN (down)	UP (up)	DOWN (up)
IWM Russell 2000	DOWN (down)	DOWN (up)	UP (up)	UP (up)
EWC Canada	DOWN (down)	DOWN (down)	UP (up)	FLAT (up)
EFA MSCI EAFE	DOWN (down)	DOWN (down)	DOWN (down)	DOWN (down)
FXI China	DOWN (down)	DOWN (down)	DOWN (down)	DOWN (down)
Numbers in parentheses are from 10 trading-days ago  SMA = Simple Moving Average, EMA = Exponential Moving Average

EFA, which tracks stocks in Europe, Australasia, and the Far East, is the worst of the bunch. In the trend-table above it has downward sloping moving averages on all time-frames and the slope of the 200-day SMA was downgraded from "up" to "down" in the last ten trading days. I can't predict what happens next, but the path of least resistance is certainly down.

Now a more detailed look at the US market.

As shown in the two tables below, the US markets are again slipping towards oversold conditions with more new lows than new highs on most timeframes.

US Stocks Making New Highs and Lows 01-Jun-2010
Period	New Highs	New Lows	Hi vs Lo	Hi/Lo Ratio
20 day1	106	425		0.2
50 day1	61	343		0.2
52 week1	42	89		0.5
All-Time2	30	20		1.5
1 Out of 5090 US Stocks on FINVIZ  2 From uglychart.com based on the previous close (includes funds)

US Stocks in Overbought and Oversold Conditions 01-Jun-2010
Level	Overbought	Oversold	Overbought vs Oversold	OB/OS Ratio
Mild RSI(14)=60 vs 40	193	1976		0.1
Moderate RSI(14)=70 vs 30	40	262		0.2
Extreme RSI(14)=80 vs 20	6	28		0.2
Ridiculous RSI(14)=90 vs 10	1	4		0.3
1 Out of 5090 US Stocks on FINVIZ

Very few stocks remain above their short term and intermediate term averages, and just 50% are above the 200-day Simple Moving Average -- down from 56% on May 28th and 66% on May 14th. This means a lot of stock charts are deteriorating. While the market is getting more oversold it has not yet reached an extreme where there would be a high probability of a short-covering rally.

US Stocks in Relation to their Moving Averages 01-Jun-2010

Many of the sectors I scanned still have upward sloping 200-day simple and exponential moving averages, so it would give credit to the longest timeframe and be prepared for a decent up-move. On the other hand, a few sectors have recently switched from up-slope to flat (e.g., XLP) or from flat to down (e.g., XLV) and no sectors were upgraded. This evidence shows that some sectors are getting weaker and no sectors are getting stronger.

Trend Direction by Sector 01-Jun-2010 vs. 17-May-2010
Index	Slope of 20-day SMA	Slope of 50-day SMA	Slope of 200-day SMA	Slope of 200-day EMA
XLY Consumer Discretionary	DOWN (down)	DOWN (up)	UP (up)	UP (up)
XLP Consumer Staples	DOWN (flat)	DOWN (flat)	UP (up)	FLAT (up)
XLE Energy	DOWN (down)	DOWN (down)	DOWN (up)	DOWN (down)
XLF Financial Services	DOWN (down)	DOWN (down)	FLAT (up)	FLAT (flat)
XLV Health Care	DOWN (down)	DOWN (down)	DOWN (up)	DOWN (flat)
XLI Industrial	DOWN (down)	DOWN (up)	UP (up)	FLAT (up)
RWR US Real Estate	DOWN (up)	DOWN (up)	UP (up)	UP (up)
RWX Intl Real Estate	DOWN (down)	DOWN (down)	DOWN (up)	DOWN (down)
XLK Technology	DOWN (down)	DOWN (down)	UP (up)	FLAT (up)
IYZ Telecom	DOWN (flat)	DOWN (up)	UP (up)	FLAT (up)
XLU Utilities	DOWN (down)	DOWN (flat)	DOWN (up)	DOWN (flat)
Trend in parentheses is from 10 trading-days ago  SMA = Simple Moving Average, EMA = Exponential Moving Average

In summary, there are a lot of downtrending markets, sectors, and stocks out there. However, half of US stocks are still above their 200-day moving average and most US sectors and markets still have s positive sloping 200-day average. This gives some support to the bullish case for US stocks (see another blogger's reasons here). Overall though, there are a lot of mixed messages so I think it is more important than ever to be selective and manage risk.