Headwinds Stall the Market At Key Trendlines

Stocks ran into stiff headwinds on Tuesday and simply ran in place. Bears continued to sell this resistance zone, while bulls kept buying to levitate prices. The market showed definite signs of fatigue after a big runup over the last week and some of our key short term indicators ended the day on sell signals.

The Oddball indicators, which use breadth alone as a buy or sell criterion, were on sells for the NYSE and NASDAQ. Breadth was positive, but only barely so, with a ratio of advancers to decliners of 1.79 on NYSE, 1.55 on NASDAQ. Oddball compared today's breadth with yesterday's and decided that the slackening number of advancers was a bearish sign, hence its sell signals. This indicator has been one of the better ones over the years despite its "Keep It Simple, Stupid" logic. Sometimes simple works very well.

The spread indicators are still on buys, but some are likely to issue sells very soon. The NDX-SPX spread indicator is the thickness of a human hair from a sell signal in fact. NDX (NASDAQ-100) is our best "lead dog" and it usually turns up or down ahead of the blue chips, so this is the one which usually gives us a good heads-up. RUT-SPX tends to also be good at signaling a turn. It actually briefly went bearish, but bounced into the close. Looking at the daily ratio of the RUT to the SPX (Russell 2000 to S&P 500), we can see that this indicator has done a good job of finding tops in the last few months:

As you can see, this indicator, which uses the fact that the small stock sector tends to turn ahead of the blue chips, has been good at indicating when the market was topping and when it was bottoming. Right now, unless we get a strong breakout, the message is one of caution for traders.

We have some indicators which are pointing toward a trading low in stocks around the 3rd or 4th of April. And, we have indicators in the bond market pointing toward a trading high (perhaps a long term high) in bonds around that same timeframe. So, these two sets of indicators are lining up for a potential major turn in both markets. During the past few years, bonds and stocks have moved opposite each other due to the flight-to-safety quality of the bond market. When bonds top and head lower, stocks tend to rally as money seeks a better return. When credit problems emerge, money flows out of stocks and into bonds. With the credit markets still likely to be enduring months if not years of healing ahead, this relationship isn't likely to change. A top in bonds is a very bullish sign that stocks will be heading to the upside.

But, for the short term, we are likely to see stocks moving lower and bonds moving higher.