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Price action gives mixed signals

Lesley Beath  |  30 May 2016Text size  Decrease  Increase  |  

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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does have an interest in the securities disclosed in this report.


The major US market indices are interesting in that they present a diverse picture.

The Dow Jones Transport Index is below its 2015 downtrend. The Dow Jones Utilities Index is not too far from its all-time highs.

The Dow Jones Industrial Index broke above the 2015 downtrend in early April, peaked soon after and then drifted lower to test the downtrend. It bounced from the downtrend last week.

This index differs from the S&P 500 in that it held above its 2010 uptrend during the early 2016 retreat.

The S&P 500 broke above the 2015 downtrend in April but quickly retreated into the trend. Last week it pushed above it again.

The NASDAQ has traded in a wide range over the past year. As opposed to the other indices, there has been no distinct downtrend. Like the Dow Industrials, the 2010 uptrend was not violated earlier in the year. The index bounced from that trend line last week.

The Russell 2000 broke above the 2015 downtrend and the 200DMA in April, then drifted lower. Last week it pushed back above both.

So we have a mixed bag.

While most focus on the S&P 500 as the bellwether for the US market, I find it prudent to watch all indices. When you get a situation as we have now, sometimes watching everything can cause some confusion.

But better to be a bit confused than ignorant of what is going on.

Price action over the past few weeks has given mixed signals. Just as I thought the market was finally succumbing to the sell signal that was generated a month or so ago, last week's strength has altered the landscape once again.

I said in the last report the US market was proving to be resilient. And given that bullish sentiment was at such a low level, recent strength does not really surprise.

But will this be just another false signal? I don't know, but sentiment indicators are signalling the possibility of continued upside.

Last week's numbers for the AAII Sentiment Survey continued to show a remarkably high neutral reading and a low bullish reading.