Measuring the Rally's Quality

Examining the current rally's strength and staying power, the Chartist surmises that we are closer to its end than its beginning. Weigh in on our message board.
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Oct. 8, 1999

OK, so we've got a rally under way. While that's good news for the market in the short term, it is important for us to measure the quality of the rally to see just how much strength, as well as staying power, it has.

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One of the first things I look at when determining the quality of the rally is market breadth. (Now before I get a zillion emails telling me how breadth doesn't matter anymore, my opinion is that breadth matters. I have written enough

columns on why I believe it does that I prefer not to debate that point yet again.) And this rally's breadth has been dismal at best. To put it in perspective, the

Dow

has rallied about 500 points, the

S&P

has tacked on about 40, and cumulative breadth on the

NYSE

is about 200 issues away from a new low. That says that most stocks may have stopped going down for the past week or so since the rally began, but that's about the best we can say. They certainly have not participated in the upward surge we've seen in the averages.

OK, for those who want to quibble about breadth, how 'bout volume? Cumulative volume on the NYSE is only a net positive 700 million shares away from its low. That too is unimpressive.

Of course, it does not take a rocket scientist to see how few stocks are making new highs either. That is not exactly a sign that stocks are outperforming the averages, one of the best ways to determine the quality of the rally.

In addition to that, you can also see how the Dow Jones Industrial Average ran smack into its first resistance at 10,600. In fact, the utilities managed not only to halt their rally, but then proceeded to slide significantly after reaching resistance.

Which brings us to the

Transportation Average

. The transports' rally of 200 points, or 7%, has been impressive. But you can see from the chart that this average is now just shy of its overhead resistance. And the most disconcerting aspect of this is the change in sentiment. Did you hear the upgrades being spouted yesterday on the airlines? C'mon, what's changed between last week and this week except that the stock price has rallied? While very anecdotal, that upgrade says a lot about how sentiment has shifted to a more comfortable stance in just one week.

Now with the

Nasdaq

trading at its high, the quality of the rally is also quite important. The cumulative advance/decline line on the Nasdaq has never been useful, in my opinion. There are so many stocks on the Nasdaq that the numbers are distorted. However, the number of stocks making new highs is not distorted and is therefore quite important. If the Nasdaq Composite is trading at its high, then we would surely want a majority of Nasdaq stocks to be keeping pace with the average. The Nasdaq is currently pennies shy of a new high, and there's a huge disparity in the number of stocks that made new highs along with the average back in June (253) vs. now (yesterday was 105). That speaks of a narrow advance, which is the type of advance that is unsustainable.

If we take a look at the overbought/oversold oscillator of the Nasdaq, we can see the lessening of the upside momentum with each rally since the July high. We have reached a lesser overbought reading (a lower high) in each rally since. That also speaks of a market that is getting narrower and weaker on each rally. And have you seen how much difficulty the Nasdaq is having getting through this 2900 level? It may very well blow through at some point, but right now it is showing itself as formidable resistance.

The most vulnerable stock I find on the Nasdaq is

Intel

(INTC) - Get Report

. It has broken an uptrend line dating back to its late May/early June low and has sat here, trading below that broken uptrend line, with very little steam to its recent rally. (I am unable to draw in the broken uptrend line on the chart, so please use your own pencil.) It is not a top of great magnitude; it's just that the chart says we could see a quick, sharp drop in here down to support in the upper 60s.

In the short term, we have not yet reached a maximum overbought; that's coming next week. In addition, the other indicators, which signaled the start of the rally for us, have not rolled over yet. The earliest I expect that will happen is the middle of next week. For those reasons, this rally likely has some more room on the upside. However, I suspect we are closer to the end of the rally, rather than the beginning.

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.