Wednesday, November 11, 2009

Divergences on the Market Radar

We hit bull market highs today in the S&P 500 (ES) and NASDAQ 100 (NQ) e-mini futures markets and the Dow Jones Industrial Average (DIA). However, quite a few segments of the market were lagging. New 20-day highs were about 900 on the day, down from over 2500 at the October peak. Notably falling short of bull highs were the Russell 2000 Index (IWM) and the S&P 400 midcap stocks (MDY), as well as the Dow Transports and Utilities.

We also failed to make new bull highs across a number of sectors from the S&P 500 universe, including materials shares, energy stocks, financials, homebuilders, and utilities.

Indeed, according to FinViz, only 53% of all stocks are trading above their 20-day simple moving averages. We are also shy of bull highs in the advance/decline line for all NYSE common stocks, according to Decision Point. Decision Point also reports that over 90% of NYSE shares were above their 20-day exponential moving averages in September. That declined to a bit over 80% at the October peak and now stands at 68%.

All of these are yellow caution lights, not outright sell signals. Should, however, we fail to see a pickup in strength/breadth and prove unable to sustain those new price highs in the large cap indexes, I would expect to see a healthy retracement of the market's rise thus far in November. Conversely, a broadening of the rally would suggest that the bull is intact, continuing its pattern of successively higher price lows during corrections.