Give This Rally a Rest

Chasing stocks up here is quite risky at this point, the Chartist says, and stocks need a breather. A break would be healthy for this aging bull market.
Author:
Publish date:

Nov. 16, 1999

Are we really on hold, waiting for the

Fed

meeting today? I don't think so.

Today's Market: Join the discussion on our

message boards.

The market has run pretty far pretty fast in the past month. The numbers show it: the

Nasdaq

up 20%, the

Dow

up 8%, the

S&P

up 12% and the real head-turner, the

Russell 2000

, up 11%. The Russell has turned heads mostly because the rally hasn't been a predominantly big-cap rally. The small-caps have participated in a meaningful manner, and that is a big change from anything we've seen since last spring.

The Russell is nearing some significant resistance here and is entitled to consolidate and digest its gains. But the Russell's impending resistance is not the only reason I say we may consolidate the gains in here.

The

Nasdaq

and the

NYSE

oscillators are in different places right now. The NYSE has come off quite a bit from its peak overbought reading on Oct. 29, but is still not yet at a maximum oversold level. However, the good news is that it reached an overbought reading higher than any since April, which shows this rally has had better upside momentum than any rally in the past six months. I expect this oscillator's oversold reading will be rather shallow.

As usual, the Nasdaq is another story altogether. It is overbought. If you squint, you can see that peak reading on the chart from last Wednesday. Although the market has since climbed another 2%, it has yet to surpass last Wednesday's peak momentum reading. Add to that the Nasdaq's inability to surpass its peak overbought reading in July. Unlike the NYSE, this market is showing signs of narrowness into its rally, not expansion. It has begun to act tired.

There is something else that bothers me about the Nasdaq: the failing number of new highs. Let's face it, the Nasdaq is now about 350 points higher -- that's 10% -- than it was in July, yet we have fewer stocks making new highs than we had then. That number had been expanding rapidly and bullishly until Oct. 29 and has since just held steady.

Of course, there is no timing to that raw number. One way to time this market is using the 10-day moving average of new highs minus new lows. When the raw data begin to form a trend, as they do on this chart, that clarifies the picture for us. The chart appears to be resting right now. It stopped ascending late last week and has now flattened out. Should this indicator turn down, we can expect a correction period to set in on the Nasdaq. You can see a similar pattern on the chart at the July high.

No, I am not looking for a July-style selloff. There's been too much improvement underneath in too many stocks for that. But I think chasing stocks up here is quite risky at this point. A rest or consolidation will help stocks take a much-needed breather. None of us is as young as we used to be, and this aging bull market is no exception. Taking a rest should be considered healthy, not detrimental.

Take

Qualcomm

(QCOM) - Get Report

, for example. The stock has nearly doubled in the past two weeks. You'd have to be crazy to think that it could possibly keep up that pace! And why is everyone more worried about Qualcomm's reversal than the reversal in

Altera

(ALTR) - Get Report

the other day? One stock does not make a market on the upside, and it does not make a market on the downside. These stocks are all extremely overbought and overextended; they are in need of a rest. Let them rest.

Some stocks have done some backing and filling in the past few weeks, which has helped flesh out their bases. Many still require more work but are buyable into dips. In the cyclical area,

International Paper's

(IP) - Get Report

resistance ought to turn it back from here, but that should only make the chart better.

Alcoa

(AA) - Get Report

is also getting more interesting. And so is

3M

(MMM) - Get Report

. Also in the DJIA,

McDonald's

(MCD) - Get Report

has finally broken out of its

Wal-Mart

-style

(WMT) - Get Report

base. Its target is up near 60. And speaking of Wal-Mart, while it hasn't done anything wrong, it is just one point shy of its 62 target.

Elsewhere,

Merrill Lynch

(MER)

finally broke through 80 and has a target near par.

The moves in

Ameritrade

(AMTD) - Get Report

and

E*Trade

(EGRP)

appear to be very real, off small bottoms. They are at resistance but will look OK into dips.

On the subject of what's not acting well,

IBM

(IBM) - Get Report

is obvious to all. So is

Kodak

(EK)

. And

Intel

(INTC) - Get Report

too. But I also think

Pepsi

(PEP) - Get Report

is acting quite lethargic. And

Dell

(DELL) - Get Report

can't seem to get out of its own way.

One group of stocks continues to act poorly in the face of good news: the oils. Why aren't they screaming to the upside when the price of oil is at (nearly) three-year highs?

I have no idea what the Fed will do Tuesday. Or what the

Consumer Price Index

will be after that. But I do know that a great many stocks are overextended and in need of a rest. And it's always best to take a rest before exhaustion sets in.

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.