October 2009 Stock Market Analysis

Love or hate it, the US stock market has dazzled us this year. With the S&P 500 up a whopping 64% since its March lows, can this rally go any higher?

From my view, it appears to be running out of gas. I say this because I feel there is a very good chance that we are hitting a top. I hate calling tops because they are so difficult to call but I've noticed some things that I don't like.

This has no doubt been a strange market. The entire move from March 2009 to mid October 2009 has been up trending on decreasing volume. I just cannot help but feel that it is exhausted itself. Every major index ETF I look at has declining volume - DIA, SPY, QQQQ.

Next, there is a noticeable lack of volume in the ESZ9 e-mini contract as the market has gone up. The same goes true for YMZ9 and NQZ9 contracts. Volume dropped off noticeably yesterday on an up day.

Volume the past 30 days has increased on days when the market has fallen and since three weeks ago, the volume in contracts has been way less than the previous three weeks.

As earnings have come in, they have looked pretty good. Google, Intel, Goldman Sachs, and Apple, have wowed. JP Morgan has really impressed me. But when you look at how far, how fast these have gone in percentage terms off their bottoms, you cannot but help to think they are expensive.

JP Morgan has been hitting new 5 year high revenue figures as well as Goldman Sachs. However, their earnings are not hitting highs over that period. JP Morgan is trading near 5 year highs. Goldman Sachs is still a bit a ways from it. Still, with Goldman Sachs making nearly a 300% run up off its bottom and JP Morgan nearly a 200% run up so fast so quick you have to wonder when profit taking is going to come in.

Lets take a look at some stocks.

Bank of America (BAC)

Bank of America has had a nice run bouncing from $2.53 to nearly $20. That is a tremendous percentage gain of nearly 800%. When was the last time you got that kind of return in 8 months on any stock?

Also look closely at the chart above. If my eyes are not deceiving me, it appears that Bank Of America broke its uptrend.

Apple Computers (AAPL)

Apple Computers has had a terrific 12 month run from $78 to now $200 after hours (as of yesterday). However, I cannot help but notice that this is starting to look like a triple top. Notice also that the volume has been on a constant decline. Its also amazing how little volume moved this stock up.

Intel (INTC)

Intel made a nice little bounce off $12 last year and is currently sitting a little above $20. I wanted to see a longer term history of the stock to get a sense of price levels. Here we can see a long term 7 year descending triangle is in place and that volume since October 2008 has been declining.

In the chart above, I have taken the last 4 years of quarterly earnings and connected with colored lines same quarter earnings. You can see that the trend for this quarter over same quarters is really down, not up. I believe the market here is waiting to see next quarter's earning and if it guides higher. If it comes in at around $0.32, this will be a good number and the stock deserves to trade in the $25's. If it misses, sub $15 is likely.

Alcoa (AA)

Lastly, lets take a look at Alcoa which finally poked its head into the green last quarter. But notice, it is nowhere near earnings levels and revenue levels of the past 4 years.

Looking at the monthly chart, I would appear that Alcoa is in a descending triangle pattern over the last 10 years. This one looks like it has the best potential for a recovery over the long.

About Kerry Kobashi

Kerry is the founder of KerryOnWorld. He lives in Silicon Valley and has worked as an engineer and project manager. He owns Kobashi Computing a consulting company.