Using a Basket of Stocks to Track the Stock Market

The Advance-Decline Line for my basket of 40 S&P stocks (five highly weighted issues across eight S&P 500 sectors) is now knocking at the door of bull market highs. Notice how the recent decline led to only a shallow pullback in the advance/decline numbers for these 40 super-caps.

In my recent post, I emphasized the need for traders to filter information. One such filter is to limit the number of stocks you follow at one time to gauge sector/market strength and weakness.

A few readers have asked me for the composition of the 40 stocks in my basket. Here they are:

Materials: DD, DOW, AA, IP, WY
Industrials: GE, UPS, BA, UTX, MMM
Consumer Discretionary: CMCSK, TWX, HD, DIS, MCD
Consumer Staples: PG, MO, WMT, KO, WAG
Energy: XOM, CVX, COP, SLB, OXY
Health Care: PFE, JNJ, MRK, LLY, AMGN
Financial: C, AIG, BAC, WFC, JPM
Technology: MSFT, INTC, IBM, CSCO, VZ

I've also found that it's very helpful to track the new highs and lows among these stocks on a 5- and 10-day basis. Divergences frequently help to identify price movements that are likely to retrace. This is particularly the case when fewer than half of the stocks in the basket participate in a move to new highs or lows.