PREP: Bottoming Stock Market or Gain Before Eventual Pain?

I've received quite a few questions from traders about stocks and whether we're putting in a bottom here.  The question is understandable.  If you look at a chart of the NYSE Composite Index ($NYA), for instance, you'll see that we've bounced off a support area.  Too, you can see from the number of fresh three-month highs minus lows among all common stocks (charted above), that we are at levels consistent with pullbacks during the past year or so.

What the chart doesn't show is that pullbacks in 2012 (early June, mid-November) occurred with well over 1000 issues making three-month lows over three-month highs.  While we did bounce off lows today, that occurred after new three-month lows had expanded from their April 11 levels:  782 vs. 621.  

Perhaps even more interestingly, new three-month lows (at 782) are getting close to the level we saw early in February (968), even though SPY is well above its early February price.

All of this suggests deterioration from my perspective.  Small cap and growth-oriented NASDAQ shares are underperforming, contributing to the new low heaviness.  In a bottoming market, you'd like to see fewer shares participating on the downside, as stronger, pro-risk sectors begin to assume leadership.  So far, that is not happening.  It's the defensive names and sectors that are near their year's highs.

My models weigh the 2013-2014 experience strongly and so have been bullish lately.  And, yes, we have gotten some bounce.  I am mindful, however, that we may be breaking recent regimes--hence the close watch on breadth and downside participation.  Those measures suggest we're not getting stronger.

Further Reading:  An Earlier Read on Market Strength