In the end of year market at a glance we discussed the market activity and I made the suggestion that the market was looking toppy. Now we are at the end of February and indeed the indexes have broken down some and are trading below their trendlines drawn from lows earlier in 2009 on a daily chart.
The Dow, S&P and Nasdaq are all trading at or near their 25 and 50 day MA. The Russell 2000 is the only index of the four that is trading above the 25 and 50 day MA currently. All four of the above indexes are trading above the 200 day MA for the time being.
On balance the Dow and S&P appear to be a little weaker than their smaller cap cousin indexes the Nasdaq and Russell. This could be in part to a stronger dollar which impacts multi-national companies that do substantial portions of their business abroad. A stronger dollar cuts into their overall profit picture a weaker dollar makes their exports abroad cheaper to sell there.
The Russell which has 2000 companies in its line up is perhaps a broader barometer of market sentiment. This index had corrected deeper during the pullback in Oct. than the others and is currently stronger. Sector rotation and small cap preference perhaps looking for growth may be additional reasons for this index to outperform.
The next several weeks seem to be crucial as to whether the indexes will be willing to continue higher or not for the first quarter or perhaps first half of the year. On the Dow we have drawn a new trend channel which takes into account the March 09 low and the current low pivot in Feb. If the channel is broken the next area of support will be near the 200 day MA in the 9700 area.
We continue to advise caution on the long side as the markets have obviously been volatile and choppy and volatility is likely to continue as no real dominant force appears to have taken control of market activity yet.
