Saturday, August 05, 2006

Signs of a Risk-Averse Market

Back in the late 1990s, the NASDAQ was perceived as the stock exchange representing high growth as well as high tech. Ah, what a difference a few years makes. On Friday, we had 181 NYSE stocks making new 52-week highs, according to the excellent Barchart site. A total of 24 NYSE issus made fresh 52-week lows. On the NASDAQ, only 81 stocks made new highs, against 71 new lows.

If we just look at the S&P 500, we see that 43 stocks made new 52-week highs, against 6 new lows. Among the NASDAQ 100 issues, 7 made new highs and 1 made a new low.

Fully three-quarters of all S&P energy stocks are trading above their 50-day moving averages, and over 50% of all S&P 500 stocks. Alas, only about a third of NASDAQ issues are displaying comparable strength.

But it's not just the NASDAQ. Signs of a risk averse market abound. The top four performing sectors, according to Barchart, are gold, silver, soft drink/beverages, and copper. According to Decision Point, the top three Rydex sector funds in terms of assets are Energy Services (228.3 million), Precious Metals (209.7 million), and Energy (175.3 million). No other sector reaches 100 million dollars in assets. Technology? It's down to 16.8 million. Internet? 3.9 million.

The ratio of Rydex bear fund assets plus money market assets to bull market assets is 1.09, in Decision Point's latest tally. Traders are not pouring money into Energy Services, Precious Metals, and Energy because they love stocks. They are making big bets on Dollar Armageddon, just as daytraders back in the day made big bets on the Internet.

In such an environment, big is better because it's perceived as safer. Of stocks trading above $10 a share, 289 made new 52-week highs on Friday and only 49 new lows. But stocks trading under $10? 19 new 52-week highs and 78 new lows. The percentage of S&P 600 small-cap stocks trading above their 50-day moving averages has lagged that of the large cap S&P stocks since May--as has the small-cap advance-decline line vs. that of the large caps.

During the early part of the recent bull market, small and midcap stocks led the way up. That is no longer the case. Value stocks among the S&P 500 have recently trounced growth issues, and value funds in the Rydex attract far more assets than growth. It's a risk-averse mentality, and it's one of the few things keeping my own bearishness in check. If there's one truism in finance, it's that markets do not reward systematic risk aversion.