Tuesday, July 03, 2007

Is the Bull Market in Jeopardy?

I've heard from quite a few readers who are anticipating the demise of the bull market in stocks. There is certainly no shortage of reasons for doubting the bull, ranging from rising interest rates to the housing slowdown to the possibility of a credit contraction in the wake of the subprime mortgage problems. Some commentators are expecting a bear market simply because we haven't had one in quite a while!

Still, I have to say that my data are not supportive of the bear at this juncture. Above we see a chart of the S&P 500 Index (SPY; blue line) plotted against the daily advance-decline line for the 40 highly weighted stocks that I track for money flow purposes. These stocks are evenly divided among eight S&P sectors--and are the most highly weighted stocks within those sectors--thus providing a representative view of the large cap market.

The best way to view the chart above is to compare it to the recent money flow chart that I posted for the S&P stocks. In that money flow chart, we saw that there was a surge of dollar inflows to the S&P stocks following the June/July, 2006 weakness. In the chart above, we can clearly identify that this surge led to a considerable expansion of bullish action, raising the advance-decline line to multi-year highs.

We can also see from the money flow chart that flows--while down from their peaks--remain in an uptrend. Similarly, the recent market weakness has taken only a modest toll on the advance-decline line.

In short, there is nothing I can see in the recent corrective action that suggests a reversal of money flows or weakness in the advance-decline line. Pullbacks in flows (and in the AD line) are occurring at successively higher levels. I expect weakness in money flows and divergences in the AD lines for the various market sectors--as we saw at the 2000 peak and even during the March-May, 2006 period--prior to any full fledged bear move.