Monday, April 28, 2008

Indicator Review for April 28th

This is the 1500th post to the TraderFeed blog, going back to December, 2005. Three of the past four months have hit high water marks for numbers of visits to the site. Add those 1500 posts to nearly 2500 Twitter "tweets" and the information starts to add up! I want to thank readers for their continued interest and support.

Last week's indicator review noted signs of market strength, but also some concerns on the horizon with respect to money flows into Dow stocks and the cumulative NYSE TICK. This week features much of the same, but with a few more cautionary notes regarding the price strength.

The top chart requires some explaining. I recently posted money flows from the ten most highly weighted stocks within eight S&P sectors: financial, consumer discretionary, energy, consumer staples, technology, materials, industrials, and health care. I combined the money flows from those 80 stocks (the specific issues are identified in the sector posts) to arrive at an estimate of money flows into and out of the S&P 500 Index.

If you review those sector posts, you can see that there are wide variations of money flow from sector to sector. That tells us that we are not seeing money being put to work in the market in a broad-based fashion. Across the sectors, however, selling pressure (money outflow) has been waning, which you can see in the top chart from the rising lows in the five-day flow figures. Moreover, since the start of April, we have seen rather consistent flows into the S&P 500 stocks. To this point, flows are confirming the price highs that we've been seeing, but there are notable laggards among sectors--hardly a vigorous bull move.

This selective nature of the recent price strength can be observed in the new high/new low data (middle chart). Note that, during the recent move to price highs in SPY, new 20-day highs minus lows have been lagging. Moreover, this non-confirmation continues to show up in our cumulative NYSE TICK measure (bottom chart). Last week's indicator review highlighted the importance of the 1400 area as long-term resistance in the S&P 500 Index. If we are to sustain a break above that level, we need to see indications of expanding participation in the strength. While we *are* seeing expanded money flows across the sectors, the variability from sector to sector; the lagging number of stocks registering new highs; and the lagging cumulative TICK give this bull move something of a yellow caution light.

Here's a quick look at other indicators and what we might glean from them:

* Treasury interest rates have risen sharply in the past week, especially at the short end. There is growing speculation that the Fed may pause after one final interest rate cut this week. This is dollar supportive, but it also suggests that market participants are weighing the possibility that we're dealing with a normal recessionary economy, not a deflationary one requiring Japanese-style quantitative easing. It also indicates a much reduced need for the flight-to-safety trade, which frees capital for stocks.

* My Cumulative Demand/Supply measure, which has nicely tracked intermediate-term market peaks and valleys, is moderately overbought at a reading of +22. Readings of +30 and above have corresponded to 20-day periods of subnormal performance in the S&P 500 Index. We hit that +30 level back on April 18th. Interestingly, the recent price highs in SPY have occurred at lower levels in the Cumulative DSI, suggesting once again that fewer stocks have been displaying strong upside momentum as we've moved to the 1400 level in the June ES contract.

* We're seeing a continued expansion of stocks trading above their 200-day moving average. Among the S&P 500 issues, 46% are now above their 200-day averages, the highest level of 2008. That proportion is 39% for S&P 600 small cap issues, which have lagged a bit recently.

* Friday saw 51 new 52-week highs among NYSE common stocks and 23 new annual lows. That is significantly less than the over 100 new 52-week highs registered the prior week. I'm watching this closely; we need to see expanding new highs if the bull move is to be sustained.

* We continue to see technical strength within my basket of 40 stocks, with 27 issues trading in uptrends, 4 neutral, and 9 in downtrends. This is down from last week's peak, but still robust.

The bottom line is that we *are* seeing reduced selling in stocks and selective increased buying. How selective the buying remains--or how it can broaden out from here--will tell the story of whether we fall back into the multi-month trading range or sustain an intermediate-term move to new highs.