Figure 1 is technical. Figure 2 also employs fundamentals. The $NDX:$SPX ratio is a proxy for increased risk appetite evidenced by more and more investors buying the earnings growth of the firms within the $NDX since the prior lows seen in November 2008.

Investors are correct about $NDX fundamentals, which we touched upon in the May 2009 InPerspectives. This tech sector dominates this index. It should best the S&P's earnings growth as we export our way out of recession during the next recovery. Unlike the S&P, there are no financials in the $NDX, which weigh on fundamentals. On March 5, a rising ratio signaled that a bottom was near.

(Little did we know that when we published Figure 2 in our March perspectives piece that the S&P would bottom the next day at 667.)

Figures 3 and 4 have been updated from our March 13 article. Back then, we found that the increased percent of stocks above their 200-day moving price averages ($NYA200R) since the November 2008 and March 6, 2009 lows was evidence that deflation fear was waning.

The $NYHILO records the 10-day average of stocks trading on the NYSE that are hitting new 52-week high prices minus those setting new 52-week lows. The $NYHILO has been updated in Figure 4. Like $NYA200R, this indicator normally trades above 50 percent (%) in bulls and below 50 in bears.

On March 13, we indicated that the $NYHILO had remained above its November readings as the market recorded a series of new lows in late February and March 2009. Our view then was that market breadth indicators supported a bounce in equities until $NYHILO nears 40. In April, they briefly exceeded 70 and are now at 44 and 35.

FIGURE 3

FIGURE 4

In bear markets, readings above 40 breed technical climates where rallies often exhaust themselves. Trend exhaustion is typically followed by weeks to months of price consolidation or a sharp 5% to 15% decline. The short-term trend signal went negative on May 21 when the S&P 500 closed below its 20-day moving average (893) with a close at 888.33.

Retesting New Levels

A retest of the March low is likely if the S&P's intermediate-term trend also turns negative. It is currently neutral. More often than not, TA helps you to access risk and reward.

Figure 5 highlights the neutral nature of the S&P's intermediate-term (three to 18 months) trend signal. A buy or sell signal results if four indicators confirm each other.

For now, the intermediate trend is neutral. One of our intermediate-term indicators employs the crossover of two S&P 500 price averages. They are the exponential weekly price averages (EMA). The 13-week EMA (now around 861) crossed below its 34-week corollary (now 916) in mid-December 2007.

For some investors, this alone is a sell signal. Notice that the Moving Average Convergence/Divergence (MACD) also confirms the weekly price indicator with a reading below zero (0). What fails to confirm are the relative strength (RSI) and the commodity channel indicators (CCI), which remain above 50 and 0. CCI alone is quite overbought. It supports our short-term trend sell signal.

FIGURE 5

Over the past few weeks, the put-to-call ratio's ($CPC) 13-day EMA hit bullish extremes where sell-offs usually ensue.

FIGURE 6

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