Monday, May 19, 2008

Indicator Review for May 19th

Last week's indicator review highlighted the uneven sector performance during the market's recent rebound from March lows. By Wednesday, I noted that the number of stocks making fresh annual highs had expanded, a sign of growing breadth to the rally. This strength owed much to the midcap stocks (top chart above from Decision Point), which have recovered much of their bear market losses. We can also see the strength reflected in the move of the Cumulative NYSE TICK to new highs (middle chart above) and in the expansion in the number of stocks registering fresh 65-day highs (bottom chart).

I also note that a growing percentage of stocks are closing above their 200-day moving averages; among SPX issues, that percentage is now 58%, up from 15% at the March lows. On a shorter-term basis, 77% of S&P 500 large cap; 76% of S&P 400 mid cap; and 64% of S&P 600 small cap stocks are trading above their 50-day moving averages, also indicating good participation in the rally.

To be sure, sector variation is still present, and I will review this in an upcoming post. Financial, airline, and homebuilding stocks remain weak; energy and technology issues remain strong. Because of this uneven sector performance, I would not call the advance-decline line for NYSE common stocks strong, but it did reach a post-March high this past week.

In general, these measures of strength tend to peak ahead of price, which suggests to me that--though we may be due for some correction--we have not seen the last of the rally following the double-bottom in January/March. I continue to harbor doubts that this rally will bring us significant new price highs for the major averages. Rather, I see it as a late, selective continuation of the bull cycle that began in August, 2006. Some sectors (financials) have likely seen their bull peaks; others (energy) are still making them. If that conjecture is correct, the good news is that we should see further price strength in the major averages into the summer. The bad news is that a more significant bear may lie beyond.