Rally not confirmed by volume - ajs-capital.com

25 Pages·2011·0.61 MB·English

by  Mary Ann Bartels

Market Analysis Comment
Technical Analysis

Market Analysis | United States
17 October 2011
Rally not confirmed by volume

Mary Ann Bartels [phone] b
Technical Research Analyst
MLPF&S
(cid:132)
Market extends higher, but volume does not confirm rally [email protected]
The S&P 500 has rallied back into resistance, but volume continues to dry up on Stephen Suttmeier, CFA, CMT [phone]
Technical Research Analyst
the rallies (side bar). Since early August, lower volume days have coincided with
MLPF&S
the range highs near 1200-1230. Last Friday was the highest closing price on the [email protected]
S&P 500 within the trading range, but with NYSE consolidated tape volume of Jue Xiong, CFA [phone]
only 3.7b shares, Friday was the lowest daily volume within the range. This does Research Analyst
not support the case for a sustained move higher. The test of the August low on MLPF&S
[email protected]
04 October is a sign of a base, but the lack of volume on the rally suggests more
time is needed to build a base.
Levels for the S&P 500
Critical Support: 1100-1075 – range lows that can be tested again. Next support Volume within the trading range
at 1020. A 50% probability remains of 985-910. Within the trading range, higher volume
Resistance: 1200 to 1260 with falling 200-day moving average near 1276. accompanies the lows and lower volume
coincides with the highs. This suggests
Trip Wires still negative – more time needed to form a base
that investors are fearful at the lows and
The Trip Wires suggest more time is needed to form a base.The only change last
not buying into the rallies to the highs. Not
week was the slight improvement in the Volume Trip Wire. With accumulation
a positive price and volume pattern.
above distribution, the Volume Intensity Model (VIM) moved to positive, but in the
S&P 500 (top) with NYSE volume (bottom)
context of a bearish trend for VIGOR, Volume remains negative in the Trip Wires.
Short-term indicators becoming overbought
Within a trading range, markets tend to respond to short-term overbought and
oversold readings. Many of the short-term indicators we track are overbought,
which could limit a rally. The McClellan Oscillator, 14-day stochastic, 10-day most
actives, and 10-day up vs. down volume have become overbought.
Stronger pattern for Banks is key for broader market
Bank stocks remain a major market headwind and show no signs of leadership.
To help confirm a better bottom in the US equity market, the Banks need to
bottom out or at least begin to improve on a relative price basis. On the KBW
Banks Index, the key resistance to regain is 43-44. In our view, this would set a
stronger tone for the broader US equity market.
Retailers positioned for strong rally Source: BofA Merrill Lynch Global Research, Bloomberg

Based on a strong seasonal bias for 1Q and 4Q, retailers are positioned to rally Support and resistance levels
sharply over the next five to six months. Using data back to October 1989, the Support Levels 1st Support 2nd Support
S&P 500 Retailing Index has an average price return of 11.1% for the October S&P 500 1100-1075 1020-910
through March period (4Q and 1Q). The retailers also outperform the S&P 500 in DJIA 10600-10400 9700-9400
NASDAQ Comp 2330-2300 2140-2075
4Q and 1Q. Five retailing stocks with technically attractive patterns are Macy’s
Resistance Levels 1st Resistance 2nd Resistance
(M), Nordstrom (JWN), Ross Stores (ROST), Tractor Supply Company
S&P 500 1200-1260 1350-1375
(TSCO), and TJX Companies (TJX).
DJIA 11700-12000 12500-12800
NASDAQ Comp 2600-2650 2860-2900
Source: BofA Merrill Lynch Global Resea rch, Bloomberg

cB58da9b710dfo662c fA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
R efer to important disclosures on page 23 to 25. Analyst Certification on Page 22. Link to Definitions on page 22. 11098090
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Market Analysis Comment

17 October 2011

Contents
Trip Wires remain bearish 3
S&P: Lower volume retest and rally 6
Short squeeze a driver of this rally 6
Hard to bottom without the banks 7
LIBOR-OIS continues to widen 7
Retailers positioned for strong rally 8
Attractive stocks with big bases 8
Stronger pattern for NASDAQ 9
Weaker pattern for NYSE 9
The DAX has a lower volume retest 10
Bullish engulfing pattern for China 10
MZM growth remains positive 11
Sector OBOS relative price model 12
Most Attractive Buy (MAB) List 17
Oscillator Methodology 19
Footnotes 20

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Market Analysis Comment

17 October 2011

Trip Wires remain bearish
We are using five technical trip wires to help confirm a market bottom. The trip
Trip Wire Signals
wires are indicators for volume, breadth, sentiment, and price action, as well as
Composite Trip Wire reading Signal
the Bands Net Tab indicator. The Five Trip Wires move up slightly to a 25 reading
0 to 30 Bearish
from 20 and remain in bearish territory. Our volume Trip Wire remains negative,
31 to 69 Neutral
70 to 100 Bullish but with a slight improvement given a positive reading for VIM and a negative
Source: BofA Merrill Lynch Global Research reading for VIGOR. Only the sentiment Trip Wire is positive.

Five Technical Trip wires
Five trip wires to a bottom Signal Scale of (0 to 100)
(cid:39)
Volume (VIM & VIGOR) 5
(cid:39)
Breadth (New highs vs. new lows) 0
(cid:38)
Sentiment (II % Bears) 20
(cid:39)
Price action (S&P 500 3% above 200-day MA) 0
(cid:39)
Net Tab Bands 0
(cid:39)
Composite Trip Wire Reading 25 (Bearish)
Source: BofA Merrill Lynch Global Research
1) Volume: Negative
Volume Intensity Model (VIM) and VIGOR
With accumulation crossing above distribution last week, the Volume Intensity
Model (VIM) moves from a sell signal to a buy signal. This signal comes after VIM
Accumulation and VIM Distribution did not confirm the new spike low for the US
equity market on 04 October. As highlighted in last week’s report, these positive
divergences with price action pointed to diminishing selling pressure and
suggested an underlying strengthening of buyers.
VIGOR continues to trend lower from a March 2011 high and is breaking support
at the late 2009 and mid-to-late 2010 lows. This is a negative or bearish sign.
BofAML Global Research Volume Intensity Model (VIM) and VIGOR – daily chart

100

90

80 VIM Accumulation
70
The Volume Intensity Model (VIM) 60
measures up volume (accumulation or 50
40
buying) and down volume (distribution or
30
VIM Distribution
selling). 20

3700
3200 VIGOR
2700
2200
1700
VIGOR is an intermediate to longer-term 1200
700
indicator of accumulation vs. distribution. 200
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
Source: BofA Merrill Lynch Global Research, FactSet, Bats Trading
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Market Analysis Comment

17 October 2011
2) Breadth: Negative
New highs vs. new lows
The 10-day moving average of NYSE new 52-week highs minus NYSE new 52-
week lows did not confirm the early October break below the early August lows
for the major US equity averages. But, this indicator remains below zero and is
oversold. A move out of oversold would trigger a neutral reading for this trip wire,
but in order to move to positive, the new highs minus new lows breadth indicator
needs to move above zero.

10-day moving average of new 52-week high minus new 52-week lows
As a measure of market breadth, we are
using the 10-day moving average of NYSE 600
new 52-week highs minus NYSE new 52- 400
Overbought
week lows. 200
0
-200
-400
-600
-800
-1000
-1200
-1400 Oversold
-1600
1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1
g-0 b-0 g-0 b-0 g-0 b-0 g-0 b-0 g-0 b-0 g-0 b-0 g-0 b-0 g-0 b-0 g-0 b-1 g-1 b-1 g-1
u e u e u e u e u e u e u e u e u e u e u
A F A F A F A F A F A F A F A F A F A F A

Source: BofA Merrill Lynch Global Research, WSJ.com

3) Sentiment: Positive

Investors Intelligence % Bears

% Bears is the most oversold since late August/early September 2010.

Investors Intelligence Percent of Advisors Bearish
Investors Intelligence (II) %Bears rose
60
back to 46.3% and is oversold. This is the
55
most deeply oversold reading since 47.2%
in early March 2009. 50
45 Oversold - too
However, the peak in II %Bears in the last 40 many bears
bear market cycle was 54.4% in mid
35
October 2008. This suggests that while
oversold and contrarian bullish, II %Bears 30
moving to the upper 40% to low 50% range 25
is not ruled out before a stronger low is in
20
place for the US equity market.
15 Overbought - too few bears

10
II & Bears is a contrarian indicator. An
0 1 2 3 4 5 6 7 8 9 0 1 2
oversold level could be one of the n-0 n-0 n-0 n-0 n-0 n-0 n-0 n-0 n-0 n-0 n-1 n-1 n-1
a a a a a a a a a a a a a
catalysts that rally the market. J J J J J J J J J J J J J

Source: Investors Intelligence

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Market Analysis Comment

17 October 2011

4) Net Tab Bands: Negative
The Net Tab Bands indicator remains at +4 and within the oversold zone between
+3 and +6. The market has a bad oversold reading, in our view, and therefore the
Bands trip wire has a negative reading. We think this indicator could be acting
The Net Tab Bands indicator remains +4 similar to 2008.
and is oversold (+3 to +6).
BofA Merrill Lynch Global Research Net Tab Bands Indicator

-6
This indicator generated three false -5
signals during the 2008 to early 2009 -4
period. These signals occurred in May -3
2008, August 2008, and January 2009. The
-2
late March 2009 signal helped confirm the
-1
early March low. The early March 2009
0
low was a retest / undercut of the
1
November and October 2008 lows, which
2
suggests that the basing process was 3
already well underway in March 2009. 4
5

6

6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2
9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1
- - - - - - - - - - - - - - - - -
an an an an an an an an an an an an an an an an an
J J J J J J J J J J J J J J J J J

Source: BofA Merrill Lynch Global Research

5) Price Action: Negative

S&P 500 vs. its 200-day moving average

S&P 500 with the 200-day moving average – daily chart

The S&P 500 is below its 200-day moving
average (MA), which is a negative
reading.

To move this trip wire to positive, it
would take a breakout above the 200-day
MA in excess of 3%.

At current levels, this equates to 1314 on
the S&P 500. The 200-day MA is declining,
which moves this trip wire’s trigger point
down over time.

Source: BofA Merrill Lynch Global Research, Bloomberg

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Market Analysis Comment

17 October 2011
S&P: Lower volume retest and rally
The S&P 500 retested the August low in early October on lower volume. This is a
sign of a base and the S&P 500 has rallied nearly 14% from the 1075 low and
has entered resistance at 1200-1260. What is of concern is the overall lack of
volume on this rally and whether there is enough volume for the S&P 500
decisively breakout to the upside.

Based on price structure alone, the S&P 500 may be forming a double bottom off
the 1100-1075 area. A sustained break above 1230 confirms this pattern and
projects up to 1350-1385, but there is still chart resistance at 1250-1260 and the
declining 200-day moving average near 1276 that could limit upside.

S&P 500 Index (top), NYSE consolidated tape volume (bottom) – daily chart
A lower volume test of the August low
indicates diminishing selling pressure and
is a sign of base-building, but the lack of
volume on the rally remains a concern.

Source: BofA Merrill Lynch Global Research, Bloomberg

Short squeeze a driver of this rally

The top 100 most shorted stocks were up 13.9% since the October 3 low,

outperforming the bottom 100 by 2.5% (see side table). This suggests a short

squeeze and the risk is that real buyers remain absent on the rally.

Performance of the most vs. least shorted stocks within S&P 1500
Performance of the most vs. least shorted
NYA index TOP 100 BOTTOM 100 TOP 50 BOTTOM 50
stocks within S&P 1500
16.0%
Performance since Performance
Group SI disclosure* since Oct. 3 low* 14.0%
Top 100
shorts 4.70% 13.90% 12.0%
Bottom
1NTsBh0ooYo0ptAtr ost5 simhn0 od 5ret0sx 434...038000%%% 11193...419000%%% Percentage of return 1068...000%%%
shorts 3.20% 10.80%
4.0%
*Performance as of Oct 13, 2011; top and bottom shorts are ranked by
standard deviation of ASIR 2.0%
Source: BofA Merrill Lynch Global Research
0.0%
performance since SI disclosure performance since Oct. 3 low
Source: BofA Merrill Lynch Global Research
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Market Analysis Comment

17 October 2011

Hard to bottom without the banks
Relative price trend remains under pressure
Bank stocks remain a major market headwind and show no signs of leadership.
To help confirm a better bottom in the US equity market, the Banks need to
bottom out or at least begin to improve on a relative price basis vs. the S&P 500.

The KBW Banks Index (BKX) is holding support at the 61.8% retracement of the
March 2009 to April 2010 rally in the 34-33 area. To improve the pattern for the
BKX and help the broader US equity market achieve a stronger base or bottom,
the level of resistance that the BKX needs to regain is the 43-44 area. This is both
chart resistance and the 38.2% retracement level.

KBW Banks Index (top) and relative to the S&P 500 (bottom) – weekly chart

The Banks need a better bottom and this
would help the broader US equity market
form a stronger bottom.

Key levels for the KBW Banks Index (BKX):
• Support: 34-34
• Resistance: 43-44
A break above resistance is required for a
better base in the Banks.

Relative to the S&P 500 the BKX remains
entrenched in a downtrend with downside
risk back to the March 2009 lows.

Source: BofA Merrill Lynch Global Research, Bloomberg

LIBOR-OIS continues to widen

The LIBOR-OIS spread is considered a measure of the health within the banking
system as well as an indicator of credit risk. Even as the US equity market has
rallied off the early October low, this measure of credit risk has risen. This
indicates decreasing confidence in the US capital and financial markets and is
also a bearish reading for the US financials in our view.

LIBOR-OIS Spread – daily chart

The LIBOR-OIS is the difference between
LIBOR and the overnight indexed swap
(OIS) rates.

Source: BofA Merrill Lynch Global Research, Bloomberg
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Market Analysis Comment

17 October 2011
Retailers positioned for strong rally
Period returns for the Retailers and the S&P 500 Average 4Q through 1Q return of 11% going back to 1989
from October 1989 through September 2011
Based on a strong seasonal bias for 1Q and 4Q, retailers are positioned to rally
S&P 500 S&P Retailers vs.
sharply over the next five to six months. Using data back to October 1989, the
Period Retailing 500 Market
S&P 500 Retailing Index has an average price return of 11.09% for the October
January -0.33% -0.12% -0.21%
through March period (4Q and 1Q) vs. 0.61% for the April through September
February 1.44% -0.33% 1.77%
March 3.72% 1.27% 2.45% period (2Q and 3Q). The retailers also outperform the S&P 500 in 4Q and 1Q.
April 0.74% 1.83% -1.09%
May 2.03% 1.26% 0.77% An attractive technical chart pattern also points to a rally for retailing stocks. Four
June -0.78% -0.72% -0.06% stocks with technically attractive patterns within the S&P 500 Retailing Index are
July 0.52% 0.56% -0.04%
Macy’s (M), Nordstrom (JWN), Ross Stores (ROST), and TJX Companies
August -0.92% -1.05% 0.13%
(TJX). One midcap name that remains attractive is Tractor Supply Company
September -0.81% -0.62% -0.19%
October 1.15% 0.89% 0.26% (TSCO).
November 3.33% 1.52% 1.81%
December 1.26% 2.02% -0.76% S&P 500 Retailing Index (top) and relative to the S&P 500 (bottom)

1Q 4.74% 0.80% 3.94%
2Q 1.95% 2.44% -0.49%
3Q -1.22% -1.06% -0.16%
4Q 6.08% 4.56% 1.52%
Source: BofA Merrill Lynch Global Research, Bloomberg

Source: BofA Merrill Lynch Global Research, Bloomberg

Attractive stocks with big bases

Stocks with big bases are a recurring theme in our Weekly Stock Charts report. In
Weekly Stock Charts, 14 October 2011, we review ten BofA Merrill Lynch Global
Research Buy- and Neutral-rated stocks with big bases.
A base is a technical chart pattern that represents either a consolidation or
bottoming process. The basing process typically points to a shift from distribution
(selling) to accumulation (buying). This reflects shares moving from weaker to
stronger hands in anticipation of improving fundamentals. An upside breakout
completes the pattern and supports the case for more significant price
appreciation.
The ten stocks with big bases featured in Weekly Stock Charts, 14 October 2011
are Allergan (AGN), ASML Holding N.V. (ASML), Brasil Foods (BRFS),
Bristol-Myers Squibb (BMY), Grupo Modelo (GMODELOC MM), Intel (INTC).
International Business Machines (IBM), Kimberly-Clark (KMB), LKQ Corp.
(LKQX), and Precision Castparts (PCP).
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Market Analysis Comment

17 October 2011

Stronger pattern for NASDAQ
The NASDAQ remains leadership

NASDAQ Composite (top) and relative to the S&P 500 (bottom) – daily chart

Strength in large cap technology stocks is
contributing to stronger absolute and
relative price performance for the
NASDAQ Composite.

Source: BofA Merrill Lynch Global Research, Bloomberg

Weaker pattern for NYSE

The NYSE remains a laggard and this is a potentially bad sign for market breadth.

NYSE Composite (top) and relative to the S&P 500 (bottom) – daily chart

The NYSE Composite is a broad-based
index of the US equity market that
includes small and mid-cap stocks in
addition to large-cap stocks

The recent underperformance of mid and
small cap stocks is providing a drag for
the NYSE Composite. But on a broader
market rally, mid and small cap stocks are
positioned to outperform. This has been
the case on the rally off the 04 October
low.

The relative price pattern is weak for the
NYSE.

Source: BofA Merrill Lynch Global Research, Bloomberg

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Market Analysis Comment

17 October 2011
The DAX has a lower volume retest
A sign that a base-building process has begun

German DAX Index (top) with volume (bottom) – daily chart

Similar to the S&P 500, a lower low in
September for German DAX Index was not
confirmed by higher volume. This points
to diminishing selling pressure and is a
sign of base-building.

The concern remains lower volume on the
rally, but the DAX is set up to test
resistances in the 6100 and 6500 areas.

Support is in the 5300 to 4965 area.

Source: BofA Merrill Lynch Global Research, Bloomberg

Bullish engulfing pattern for China

2400 appears to be a floor for a tactical rally

Shanghai Stock Exchange A Share Index (top) with volume (bottom) – daily chart

The Shanghai Class A Shares Index held a
key chart and channel support near 2400.

This index completed a bullish engulfing
pattern on higher volume, which helps
confirm a test of support and suggests the
potential for a tactical rally.

Resistance is 2635 to 2700, with a
downside price gap at 2770-2802.

Support is 2450-2400.

Source: BofA Merrill Lynch Global Research, Bloomberg
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