Feeble Rallies Fail to Inspire

This week's rebound was so feeble that it failed to take the S&P 500 back up to test the 50-day moving average. On Thursday, the S&P 500 dropped almost 1% on increasing volume. The feeble bounce tells me there is not much interest by institutions to get aggressive, even for short-term trades.

The Nasdaq Composite dropped 1.14%, which took it back below its 50-day moving average. The Nasdaq had been holding up better than the S&P 500 and the Dow Jones Industrials, but it now looks like it is also going to participate in further downside action.

Investors also received some very weak economic numbers this week. The Conference Board noted that its economic indicators rose 0.1 percent in May, matching expectations of economists surveyed by Thomson/IFR. The indicators are designed to forecast future economic activity over the next three to six months based on 10 different components such as stock prices, building permits and initial claims for unemployment benefits.

Ken Goldstein, a Conference Board economist, said, "The economy is very weak heading into the summer, with gas and utility bills possibly heading even higher, but the latest data suggest the economy has not fallen into a contraction and may not undergo one in the second half of the year."

These weak reports, along with the continuing problems in the financial sector, have kept investors on the sidelines as they try to figure out how to navigate through these uncharted waters.

Investors Intelligence Bull Ratio

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Source: SentimenTrader.com

That can clearly be seen in the chart at right -- the Investors Intelligence Bull Ratio has moved to fairly extreme lows. That means that the average investor has become very bearish from a contrarian standpoint, and these types of readings often lead to a rebound in stocks.

We could possibly see another attempt to work off the current oversold condition over the next week.

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Smart Money/Dumb Money Confidence

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The Smart Money/Dumb Money confidence indicator is showing a similar reading. It shows that the average investor continues to become overly pessimistic on the market and that has pushed this indicator down to a low of 33%, which is the lowest level since March.

Historically, when readings hit this level, the market has responded fairly well. However, an analyst at sentimentrader.com says that the best short-term edges happen when this indicator drops to 20% or below.

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Institutional Buying/Selling

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Source: Stocktiming.com

Another indicator that I watch closely is the buying and selling by institutions that are provided by stocktiming.com.

You can see from the chart at right that institutional buying has moved down and institutional selling has moved up. That means institutions are in distribution mode -- their selling is still exceeding the amount of buying.

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Institutional Index

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Source: Stocktiming.com

The Institutional Index of core holdings that I mentioned last week is still in a technical downtrend, and the index remained below its secondary resistance line this week and moved lower.

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Percentage of Stocks Above Their 40-Day Moving Average

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Source: TC2000

One of the main indicators that I use for intermediate-term timing (to add or lighten up on positions) is the chart of T2108, which represents the percentage of stocks that are above their 40-day moving average.

When the chart gets up to the mid-70 level, it is often a good time to lighten up and take profits. When the price gets down into the lower teens, it often represents very good buying opportunities. Currently, the indicator is close to 30, which represent an oversold condition, but from an intermediate- to longer-term perspective, I would rather wait for another 50% drop down into the lower teens.

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S&P 500

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Source: TC2000

The S&P 500 chart below continues to show a very weak technical pattern. It is currently nearing some short-term support, which may be the area that we see the bounce that some of my indicators are pointing to. However, longer-term indicators such as the institutional money stream at the bottom of the chart are pointing to more downside which is likely to lead to a test of at least the March lows.

You can see that the recent high failed right at the lower resistance of the head-and-shoulders top that was created last year.

The Nasdaq Composite is also nearing some short-term support and that could also ignite a bounce. However, unless we see a clear break above the 2550 area on increasing volume, and the institutional money stream breaks up from its current downtrend, the likely direction continues to be down.

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There are certainly some very good contrarian indicators showing that we are due for a bounce and that the average investor has become way too negative. However from an intermediate- to longer-term perspective, I just do not see the technical setups in leading sectors and stocks that would lead to a change in the current trend from down to up.

We certainly could have a catalyst that could spark that change, and that's why investors need to pay close attention to the market's message. But I just do not like what I am seeing and believe the best action is to continue to use protective sell stops and raise cash into rallies.

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Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.