Last week I mentioned that the nature of the bounce would tell us if we’re headed to new highs or seeing a failed rally. As of this week we’re on track to see new highs…if Russia and Ukraine will just cooperate. The underlying indicators I watch are improving enough to support a move to new highs, but the fear of a larger war in Ukraine is putting a drag on the bounce. As a result, risk is the most important indicator to watch at the moment. Even with world tension our market risk indicator backed away from a warning last week. Now only one of its four components is warning (and it has turned back up). Our core measures of risk continue to signal all clear. Fear of risk is moving the right direction and should support the market in the absence of bad news.
The ratio between VIX and VXV improved last week, but still couldn’t get back below .9 to signal the rally should continue. It was below that level during the week, but Friday’s events pushed it higher again.
The NYSE advance / decline line rose sharply last week and is on track to confirm new highs if the market can get there. This is a positive sign because it shows the buying (advancing stocks) is broad based.
The percent of stocks above their 200 day moving average improved as well and is another sign of investors buying beaten down stocks.
Traders on Twitter have cleared the consolidation warning and put in a new buy signal. This indicates that they’re accumulating stock and think a short term bottom is in place.
The things I’m watching have mostly confirmed the current rally so as long as we don’t have a risk event the odds favor a move back to the all time highs. If we get there, keep an eye out for negative divergences or more confirmation.