A look at some leading indicators

We’ve already discussed the negative condition of the NYSE internal momentum indicator series known as HILMO (Hi-Lo Momentum).  Also joining the list of weak indicators are the leading indices which are necessary for a healthy stock market: the NYSE Broker/Dealer Index (XBD) and the PHLX Semiconductor Index (SOX).

Let’s start by looking at the XBD.  Here we can clearly see the negative non-confirmation of the broker/dealer stocks.  The XBD chart has failed to confirm the higher low in the S&P 500, which suggests that the market isn’t quite as healthy as Wednesday’s turnaround would seem to suggest.  The strongest market environments are always accompanied by strength in the broker/dealers.  When this group of stocks fails to confirm the S&P it usually means there is latent weakness that must still be dealt with before the broad market can launch an extended rally phase.

The semiconductors have been perpetual laggards this summer.  While the chip makers aren’t as important as the broker/dealers, it’s still preferable to see strength in the semis when the major indices are rallying.  The persistent relative weakness in the SOX (below) is another reason why the market has had difficulty in launching a sustainable rally in recent months.

Notice also that the CBOE Volatility Index (VIX) is looking lively.  The 15-day moving average for the VIX is curling up in reflection of the rising short-term volatility.  Reading chart patterns for VIX can be much more deceptive than the patterns for individual stocks, but the short-term pattern suggests that the sellers may attempt another run on the market in the near term.

[Excerpted from the August 19 issue of Momentum Strategies Report.]