Losing Momentum

The end of the quarter may a spark a rally, but I expect momentum to continue to wane.
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Beginning in early May, momentum in the market started slowing. To clarify, this does not mean that the major indexes showed weakening prices, but that internally, the market started struggling more on the upside.

A look at key indicators

Let's begin with volume. If you look at a chart of the volume on the Nasdaq below, you can see that from the March lows until early May, volume had been rising steadily. Then, in early May, we saw a surge in volume, with the market trading more than three billion shares two days in a row.

Then, the Nasdaq had a 6% correction. Ever since the Nasdaq finished its correction in mid-May, it has risen rather abruptly, with the exception of a few sharp down days in late May. Since its low at around 1,660 in mid-May, the Nasdaq has been up 12%.In the chart below, you can see how volume has slowed since that peak in early May. If volume is the fuel for a market, then I believe this market is showing signs of weakening.

Source: Helene Meisler, as of market close on June 12, 2009.

Another sign that momentum may have peaked is evident when we look at the Overbought/Oversold Oscillator. The peak in this indicator came in late March (circled in the chart below). Each rally has made a lower high in this momentum indicator.

Source: Helene Meisler, as of market close on June 12, 2009.

If we look at a more intermediate-term indicator, such as the McClellan Summation Index, we can see that this rally off the May lows has not made a higher high with this indicator. It's a lower high. Should the Nasdaq turn down from here, I think it's very likely this indicator will head down as well.

Source: Helene Meisler, as of market close on June 12, 2009.

In terms of sentiment, the Investors Intelligence weekly survey now shows the largest percentage of bulls since late 2007, when the bear market began. Remember, this is a contrary indicator--the more bulls there are, the more bearish the indication. However, I would be surprised if this reading doesn't eventually go over 50%. I suspect it will do so sometime in the next few weeks. But whether it does or doesn't, the chart is clear in my view: There are now too many bulls out there.

Source: Helene Meisler, as of market close on June 12, 2009.

When I consider the Overbought/Oversold Oscillator in the very short term (i.e., between now and early July), I can see how this indicator could come down--back toward the oversold side of the ledger--sometime in the next several days. That, I believe, would set us up for a rally in the final days of the quarter.

I've drawn in blue on the chart below how I believe it might play out between now and the end of the quarter. However, based on the evidence I've seen thus far in the other indicators, I think such a rally would likely bring with it yet another lessening of momentum. Eventually, all that lower momentum should lead to some downward action in the stock market.

Source: Helene Meisler, as of market close on June 12, 2009.

The major indexes have not shown weakening prices, but internally, the market has been struggling since early May. Volume, the fuel for markets, has been dwindling.

Many of my indicators have shown lower readings as the market chugs back to the upside. There seem to be too many bulls out there.

I believe we'll see a rally in the next few weeks as the quarter comes to an end, but one with a lessening of momentum. Eventually, this slowing momentum may lead to the downside.