A Sigh of Relief

While the current rally bodes well, the Chartist warns that the respite from market deterioration may be brief. Do you agree? Tell us on our message board.
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Publish date:

Oct. 1, 1999

Boy, I could hear the collective sigh of relief from money managers in the U.S. all the way over here: They were so glad to see the end of this year's third quarter. Did you notice all the window-dressing that took place? Oh, not in the favorite tech names: They're up already -- no need to mark those up -- but in all those deteriorating stocks.

Of course, the real question now is: How long can the rally last and how far will it take us?

Tell us what you think on our

message board.

Since the market is still oversold, I think it's likely we will see this rally go until we reach an overbought reading, which by my calculation says there's another week or so to go. And it's not just the oversoldness that tells me this rally will last longer than one day.

For the past eight trading days, the number of stocks making new lows has held steady in the 250 range. Sure, that statistic on its own does not make for a great read, but it is certainly lower than the 337 we saw in early August when the

Dow Jones Industrial Average

and the

S&P

were at higher levels, providing us with a positive divergence. In addition to that, when we look at the indicator on a 10-day moving average, it helps us see when the short-term momentum has swung back the other way. If you squint, you can see the indicator is just beginning to roll over and head back down. Typically, we've seen a rally in the market when we get this indicator rolling over. The most recent turn, when the indicator moved from up to down, was Aug. 12, two days after the low. And that rally took the S&P from 1280 to 1380.

Add to this the

McClellan Summation Index

, which is based on the advance/decline line and is about to halt its slide as well. You can see from the chart that when this indicator halts its slide, the market rallies. However, it is important to note how feeble the rallies in the indicator were during the last two rally phases. A feeble rally in this indicator is a warning that there's still more to come on the downside.

This brings me to answer a question I received in quite a number of emails yesterday. I

wrote that I believed there would be a lid on this market and that the deterioration would continue through year-end. To my surprise, so many wanted to know why I thought this.

First, I began writing about this back on

Sept. 10 and still believe it's a likely scenario. Of course, there's the obvious reason of Y2K. I think there will be a lot of paralysis with regard to Y2K and therefore it's unlikely we will have an explosive upside move. It's more likely rallies will meet with resistance.

Next, from a technical standpoint, there has been a lot of damage in a great many stocks. I just read somewhere that more than 70% of the stocks on the

NYSE

are trading under their 200-day moving averages. While that, on its own, is not as bearish as it sounds, it also means that if this market is to show some improvement, it will take time to repair that damage. Stocks need to rebuild their bases, and that requires a lot of backing and filling. And backing and filling doesn't happen quickly. It's a time factor.

Lastly, this market has been one of group rotation in many ways. Sure, the S&P has only recently shown signs of cracking, but one by one, we've been losing individual stock groups. Each time we lost another group, the S&P got a little bit weaker, until finally it could hold up no longer. It's like a house of cards: You keep taking cards away, one by one, and eventually it falls.

I expect that rotation will continue. And I expect it's technology's turn to underperform for a while. I have shown this chart once or twice in the past, but it has been a good indicator over time. When we match the DJIA against the

Nasdaq

and the chart begins to falter, we typically follow with a period of technology underperformance. The chart now threatens to roll over.

This doesn't mean the Nasdaq will go down while the Dow goes up. It simply means it's likely the Nasdaq will underperform for a while. This is reinforced when we see how many stocks are making new lows on the Nasdaq. While the number of stocks making new lows on the NYSE is drying up, on the Nasdaq it is expanding, and that is a sign of weakness we have not seen recently.

As for individual stocks, there are not many charts I find interesting. Even

Procter & Gamble

(PG) - Get Report

has stumbled in a big way, after holding up so well. Heck,

Sara Lee

(SLE)

had news of better-than-expected earnings and couldn't muster a rally.

So Sara Lee couldn't rally on good news, but at the same time

Citigroup

(C) - Get Report

managed not to break when the rest of the financials did. This is what makes this market so difficult in here. Stocks are not reacting to news in the manner in which they should. I expect what will rally is what is most oversold and that includes the retailers, financials and maybe even the airlines.

Maybe they'll rally just enough to give us a sigh of relief.

Note: You've asked for it, you've got it! Beginning Monday, I will be posting the Nasdaq overbought/oversold oscillator and the Nasdaq new highs and lows on

TheStreet.com

in the Daily Chartist column, in addition to the NYSE charts.

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at

KPMHSM@aol.com.