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Ad Hoc Commentary: A Bounce from Here?

(May 20, 2010)

Dear Subscribers and Readers,

I apologize, but I've been sick for the last couple of days so have not had time to write a full mid-week commentary.  I apologize.  Rick Konrad, our twice-a-month guest commentator, will pen a commentary for us next Wednesday.

In the meantime, I want to briefly comment on the technical condition of the market.  Getting straight to the point, I believe the market will likely experience some kind of bounce over the next few days.  As I mentioned in our weekend commentary, we've been looking for the % of stocks on the NYSE above their 200-day EMAs to hit 60% (as of last Friday, it was around 70%).  As of Wednesday evening, this percentage has hit 63.39% - and is just slightly higher than where it was at the last major bottom on February 8 th (when the DJIA closed at 9,908.39).  In addition, the 21-day moving average of the NYSE ARMS Index just hit 1.59 a couple of days ago representing its most oversold level since mid-February 2009 (although subscribers should note that the bear market did not bottom until March 9, 2009). 

Sentiment has also gotten more oversold.  For example, the 10-day moving average of the equity put/call ratio just hit 0.68, which presents its highest level since the last bottom on February 8 th .  The ISEE Sentiment index readings are also very oversold.  Yesterday, the ISEE Sentiment reading hit 86, while its 20-day moving average declined to 105.

Finally, the U.S. equity market has been able to stage a late comeback two days in a row.  Even though the stock market indices had a negative close yesterday, the internal condition of the U.S. stock market actually improved, as downside volume/breadth, etc., wasn't as intense as it was earlier this week.  Whether the inevitable bounce over the next few days turns into a more sustainable rally, however, is up in the air.  Subscribers should watch for any dramatic improvement in upside breadth and upside volume before making bulk purchases.  For now, I still believe the European sovereign debt situation will hang over the global equity markets for the rest of this summer.  Obviously, I will update all of you as things develop.

Yours Faithfully,

Henry To, CFA

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