How Strong Is This Rally?

Here are a few observations regarding the recent rally that I will be elaborating in my weekend update to the Trading Psychology Weblog:

* It's the Weighted Stocks Leading the Way - We saw bull market highs in the S&P 500 Index (SPY) the last two trading sessions, but the unweighted S&P 500 Index (RSP) remains even with its early June peak. Those mega-cap issues that are highly weighted may also be benefiting from new lows in the U.S. dollar, supporting international sales.

* Small Caps are Lagging - The Russell 2000 Index (IWM) very slightly eclipsed its early June high today before pulling back. The weak NYSE TICK readings are reflecting lukewarm buying interest among the small caps. Indeed, advancing issues barely outnumbered losers today (+174) despite gains in the large cap indices.

* A Number of Sectors Aren't Participating in the New Highs - Even within the S&P 500 universe, only Materials (XLB), Industrials (XLI), Energy (XLE), and Technology (XLK) sectors have made new annual highs this week. We have not seen highs in Utilities (XLU), Consumer Discretionary (XLY), Consumer Staples (XLP), Healthcare (XLV), or Financial (XLF) sectors.

* Many Individual Stocks Aren't Participating in the New Highs - On Thursday, we had 234 NYSE stocks make fresh 52-week highs, down from about 300 last month. Similarly, we had 76 new highs among the S&P 500 stocks, down from about 90 in early June. Only 56 stocks among the S&P 600 small caps made 52-week highs on Thursday, down from 80 last month. Perhaps most surprisingly, we only had 8 new highs among the Dow 30 stocks. Only the NASDAQ 100 Index has shown fresh peaks in annual new highs. When we look at the broader NASDAQ Composite universe, however, only 211 stocks made new highs, equivalent to levels registered last month.

My next look will be at money flows to see if institutions are truly putting fresh capital to work in this recent rise. We are trading above the value area from a long flat correction that goes back to May. I believe we'll need to see expanded participation in the rally or risk a move back into that value region.