Don't Count Your Chickens Before They Hatch

The key phrase that we have to continue to remind ourselves of is "not to count our chickens before they hatch."  There is a very obvious movement in the shells right now, and the metamorphosis is occurring, but the recoil rally in the market has not yet fully formed and the technical resistance has so far served to stall the advance.  Our guesstimate is that (bullish) chickens will emerge and that the emergence will occur sometime in the next 3-4 weeks, but again, we have to watch the evolution to see how big and pretty the hatchings will be.

As we noted last week, one of the big resistance points is obvious in an observation of the following chart.

Click on the image above to view a larger chart.

You can see from the above illustration that it is rare that you see rallies carry more than 90% of the stocks above their 50-day moving average.  But that does not necessarily mean that a market correction is imminent.  It just typically means that you start to see more internal non-confirmations.  This makes the sector observations even more important to see the evolving sector focus and improving versus deteriorating relative strength.  It is an excellent guide to locate the new trends in the ongoing bull market.

This week, even though the chickens are not yet scrambling around for our full viewing, we do see the defensive sectors that led during the August-September correction beginning to lose their leadership.  Conversely, the Industrial and Energy stocks that were hit as recession fears were growing are now popping their heads back up.  Also, Technology continues its rally, but Financial stocks are still just sloughing along.

These are the trends that we're noticing after this week's market actions, and we'll continue to provide updates on these evolutions within the sectors.

Don Hays, Nicholas Warf and Justin Wood

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