The Friendless Trend

The Chartist describes a group rotation of stocks attempting to rally, a trend that should keep the market churning with an upward bias. Talk about it on our message board.
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Oct. 12, 1999

From deeply oversold conditions, first the Internet stocks turned and rallied. Then came the drugs. Then it was the retailers. The airlines followed suit. The financials have had similar attempts at oversold rallies, but with the exception of a few, they have been just that: attempts, not real rallies.

This group rotation reminds me of little kids playing tag. It's like investors are running around searching for some group to be "it" for the next trading session. And that game of tag is what has kept the averages high for the past several months.

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When we have group rotation like this, it is very difficult to make money in the market. It's a constant guessing game of what group will be picked to be "it" each day. And if you don't guess correctly, then you've missed the move. With a trend like that, the trend is no friend.

However, this type of group rotation can keep the market churning with an upward bias for a while. This is what I expect we will see until those indicators roll over again.

The market is chugging along toward overbought territory but is more likely to stay up in this overbought area for a while before heading lower. While that sounds confusing, it's really pretty simple. The overbought/oversold oscillator is based on the advance/decline line. I take the net differential between advancers and decliners, then calculate a 10-day moving average. This gives us the oscillator reading.

That is where we run into the first murkiness. The A/D line has been horrendous throughout this entire 600-point rise in the

Dow Jones Industrial Average

. Since the rally began about two weeks ago, we have only had five days of net positive readings in the A/D. So if we go back to the moving average concept, for the most part we are simply replacing big negative A/D readings with lesser negative readings. That says we are relieving the oversold condition of the market by not being as negative as we were, rather than by being positive. If we'd had a string of positive numbers replacing the negative ones, it would be much clearer as to when we get overbought. But with a continuous string of negative numbers, it is not as clear.

For that reason, I believe it will be more effective for us to wait for some of the other indicators to roll over. One of the best indicators I have for timing is the 10-day moving average of new highs and new lows. Calculated in the same manner as the overbought/oversold oscillator (i.e., take the net differential on a 10-day moving average), it, too, is replacing big negatives with lesser negatives, but that is to be expected since these numbers tend to trend.

You can see how this indicator's turns tend to coincide with turns in the overall market. Since it has shown no sign of rolling over just yet, I'd say this rally, or upward bias, is not yet done.

As far as sentiment is concerned, we never got a really good, clean-out whack to the downside. So this was not the kind of bottom I consider healthy, especially since there are so few bases to speak of. What we do know is that sentiment had gotten so bearish -- all you had to do was watch any financial news show to see this -- that it was time to rally. And this rally must run its course.

Aside from better statistics, one thing we need for this rally to turn into one that I'd term bullish is better-acting bonds. If the employment number on Friday was so benign, and so few believe the

Fed

will act before year-end (Y2K is the reason most often given), then why can't bonds seem to get out of their own way?

As far as individual stock charts, it is hard for me to find much on the positive side of the ledger. I like bases, and there are so few bases on the charts, that I am hard-pressed to find interesting names. If

McDonald's

(MCD) - Get Report

can get through 45, it will look the same way

Wal-Mart

(WMT) - Get Report

looked through 49. And

Lucent

(LU)

has been working on this small base for a couple of months now.

I am not so sure I can begin to guess at where the money will scatter to next, but it seems to me that the rotation into the drug stocks will run out of steam shortly, so perhaps it's best to take a profit there. I'd also add the retailers to that list as well.

So, it's likely we will continue this upside move with lousy statistics for a while longer, at least until all the oversold groups have their day in the sun and

Nasdaq's

blow-off is complete.

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.