Wednesday, May 16, 2007

Assorted Stock Market Observations

* The "stealth correction" that I noted in the Weblog is looking more corrective and less stealthy so far this week. The discrepancy in performance between the large caps and small caps continues to widen. On Tuesday, we saw 735 stocks make fresh 20-day highs across the NYSE, AMEX, and NASDAQ. We also saw 1110 stocks make new 20-day lows. That's the highest level of new lows since May 1st. We've seen below average NYSE TICK readings for 7 of the past 9 trading sessions, even as the Dow Jones Industrials have made fresh highs.

* I'm watching interest rates here. With a rise above 4.7% on Tuesday, we made a 20-day high in 10-year rates as the small cap stocks fell out of bed. Since 2005, however, rising rates have not hurt stocks. When the market has made a 20-day high in 10-year rates (N = 93), the next five days in SPY have averaged a gain of .36% (60 up, 33 down). That is stronger than the average five-day gain of .17% (277 up, 205 down) for the remainder of the days in the sample. What I'm watching for in the current market is any evidence that this pattern is changing, such that rising rates might be associated with weakness in the NYSE TICK and the small caps.

* We're seeing sector divergences in the current market. DecisionPoint notes that, among S&P 500 large cap stocks, 69% are above their 50-day moving averages, down from over 85% in late April. The proportion of S&P 600 small cap issues above their 50-day benchmarks, however, is down to 46%. Among the S&P large caps, 97% of energy stocks; 85% of industrials; 82% of materials issues; and 97% of utilities are above their 50-day averages. Only 51% of consumer staples stocks; 63% of financials; and 66% of technology stocks are above those levels. And the NASDAQ 100 stocks? Only 57% are now trading above their 50-day moving averages.

* Bounce after two days of strong selling sentiment? We've had two consecutive days in which my cumulative adjusted TICK reading has been below -500. That has occurred 16 times since 2005. Five days later, the S&P 500 Index (SPY) has been up by an average of .46% (10 up, 6 down), modestly stronger than the average five-day gain of .21% for the entire sample. To act on such a pattern, however, I need to see evidence of momentum drying up to the downside. With my Demand measure at 45 and Supply at 95 as of Tuesday's close, I'm not yet seeing that evidence.

* Yen continues to grind lower vs. the dollar. That's been facilitative of favorable stock market returns the past several years as part of the carry trade.

* Great reading - Check out the links at Abnormal Returns. Just about every article is a worthwhile read. Hats off to Abnormal Returns; they regularly scour the Web for market and industry insights.


Dr Bruce Hong said...

I think I'm seeing an interesting change in pattern. In the past few weeks, the bears would try to take it down in the morning. After about 1030, or so, the Bulls would then enter the market and take it ever higher.

Recently, it appears that the pattern is shifting. Now, the market is tending to sell off in the afternoon.

I wonder, however, if this goes back to your post about risk-assuming and risk-averse behavior in the last hour of trading. Your observation was that both were good for the bulls and, as far as the Dow is concerned, this seems to be the case.

Nevertheless, I'm starting to wonder if we're seeing the beginnings of "Sell in May and walk away."

Dr Bruce Hong said...

I think I spoke too soon!

g0thm0g said...

Not only is the gap widening between small- and large-caps, but by my dollar-weighted ETF sector returns here, small caps are actually negative for the last month and about 2% behind.

-Michael Bommarito

Brett Steenbarger, Ph.D. said...

Hi Bruce,

It does look as though the market is being much more selective in recent strength. That is usually not the profile of a robust bull market poised for continuation.


Brett Steenbarger, Ph.D. said...

Hi Michael,

Thanks for the link and comment. The shift away from small caps has been dramatic of late--