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Will Technicals Destroy Market Rally?

Posted: Nov 02, 2009 14:35 PM by Eric Fox

Tickers in this Article: SCHN, CRR, PALM, HGSI

Many investors have claimed the market rally off the March 2009 lows is an illegitimate advance that is not confirmed by fundamentals. It might be ironic then if the rally died, just as fundamentals started to get better, because certain technical measures have been breached over the last few days of trading.

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The government reported that GDP for the third quarter of 2009 grew at an annual rate of 3.5%. This indicates that the recession has ended, and might be the evidence that is needed to confirm the equity rally. However, technical trends may threaten the rally as more evidence of economic growth hits the market.

The Indicators
The Russell 2000 index is an important measure of the performance of the small cap market. The 2000 stocks in this index have a media market capitalization of $385 million. Among the largest members are Human Genome Sciences Inc. (NYSE:HGSI) and Palm Computer (Nasdaq:PALM), with market capitalization of $2.45 billion and $1.79 billion, respectively.

The Russell 2000, from a technical basis, has put in a double top and broke through its support level around 570. (For more on the double top pattern, check out Analyzing Chart Patterns: Double Top And Double Bottom.)

The large cap indexes are also threatened by technical problems. Only 43% of stocks in the S&P 500 are trading above its 50-day moving average. This is getting close to the lows reached in June 2009 of 25%, but far away from the nadir of less than 10% at the bottom in March 2009. The best sector is energy, with 75% of stocks above its 50-day moving average, and the worst is materials, with only 17% of stocks above its 50-day moving average.

The Leaders
Carbo Ceramics (NYSE:CRR) is one of the strongest performers in the energy sector, and is trading 21% above its 50-day moving average, on the back of a strong third-quarter
earnings report that beat estimates by $0.20.

Schnitzer Steel Industries Inc. (Nasdaq:SCHN) is trading 16% below its 50-day moving average. Although the company beat its fiscal fourth-quarter estimates, the company did not provide a good outlook for the next quarter and said that there would be a sequential drop in iron sales.

The S&P 500 and the Nasdaq both broke through technical support levels recently, closing below their 50-day moving average as of the close on October 28, 2009. This may threaten the market from continuing its uptrend. The 50-day moving average for the S&P 500 is at 1051.47, and the Nasdaq composite is at 2091.40.

The Bottom Line
The term "too much, too soon" has been bandied about by perma-bears who feel the market has rallied too much since the bear market bottom in the spring. These bears might get their way, not because of fundamentals, but because of technical reasons.

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator. Mr. Fox also publishes a paid investment newsletter. Please visit The Unknown Stock Report for more details.

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