Charting Stocks

The Dow Jones Industrial Average rose almost 240 points (3.5%) today. As mentioned in a previous post, large daily percentage gains are more consistent with bear markets than bulls. Todays rally was led by banks and REIT’s,  two of the most beaten up and oversold sectors – also consistent with a bear market correction.

Below is a daily chart of the DJIA.  The RSI (Top line) is used to determine an oversold or overbought security (or market).  A reading below 30 is oversold while above 70 is overbought. The market has been oversold throughout march and began rising. In a bear market, the RSI line tends to stay below 50. The current reading is 46.79, and so there’s a bit more room.

The market is oversold on a long term basis, as the chart below shows.  I wouldn’t rely  heavily on the RSI indicator when dealing with monthly charts.  Bear markets tend to get oversold and can stay oversold.

Price and momentum show a firm downtrend.

The yield on T-bills can be used as a stock market indicator. As investors get scared, they move from stocks and into bonds. The increased demand for bonds (T-bills) pushes the price up and the yield down. The chart below shows the relationship between the yield on the 3-Month T-Bill rate and the S&P 500. They rise and fall together.

In late 2008, the yield fell to zero and even went negative for a short time. People were willing to accept a 0% or negative return on their money in exchange for the safety of Treasury Bills. The downtrend in short term yields remains and should continue lower after testing the downtrend line (blue line).
Financial index continues to underperform the market.

Related posts:

1. Oversold US Dollar threatens stock, commodity, bond prices
2. Financial Stocks Starting to Rollover
3. Rising Dollar Spells Trouble for Stocks
4. Spring Rally Has Reached Completion
5. Treasury to Buy Troubled Assets…Again; Stocks Jump