Assorted Stock Market Observations

* The "stealth correction" that I noted in the Weblog is looking more corrective and less stealthy so far this week. The discrepancy in performance between the large caps and small caps continues to widen. On Tuesday, we saw 735 stocks make fresh 20-day highs across the NYSE, AMEX, and NASDAQ. We also saw 1110 stocks make new 20-day lows. That's the highest level of new lows since May 1st. We've seen below average NYSE TICK readings for 7 of the past 9 trading sessions, even as the Dow Jones Industrials have made fresh highs.

* I'm watching interest rates here. With a rise above 4.7% on Tuesday, we made a 20-day high in 10-year rates as the small cap stocks fell out of bed. Since 2005, however, rising rates have not hurt stocks. When the market has made a 20-day high in 10-year rates (N = 93), the next five days in SPY have averaged a gain of .36% (60 up, 33 down). That is stronger than the average five-day gain of .17% (277 up, 205 down) for the remainder of the days in the sample. What I'm watching for in the current market is any evidence that this pattern is changing, such that rising rates might be associated with weakness in the NYSE TICK and the small caps.

* We're seeing sector divergences in the current market. DecisionPoint notes that, among S&P 500 large cap stocks, 69% are above their 50-day moving averages, down from over 85% in late April. The proportion of S&P 600 small cap issues above their 50-day benchmarks, however, is down to 46%. Among the S&P large caps, 97% of energy stocks; 85% of industrials; 82% of materials issues; and 97% of utilities are above their 50-day averages. Only 51% of consumer staples stocks; 63% of financials; and 66% of technology stocks are above those levels. And the NASDAQ 100 stocks? Only 57% are now trading above their 50-day moving averages.

* Bounce after two days of strong selling sentiment? We've had two consecutive days in which my cumulative adjusted TICK reading has been below -500. That has occurred 16 times since 2005. Five days later, the S&P 500 Index (SPY) has been up by an average of .46% (10 up, 6 down), modestly stronger than the average five-day gain of .21% for the entire sample. To act on such a pattern, however, I need to see evidence of momentum drying up to the downside. With my Demand measure at 45 and Supply at 95 as of Tuesday's close, I'm not yet seeing that evidence.

* Yen continues to grind lower vs. the dollar. That's been facilitative of favorable stock market returns the past several years as part of the carry trade.

* Great reading - Check out the links at Abnormal Returns. Just about every article is a worthwhile read. Hats off to Abnormal Returns; they regularly scour the Web for market and industry insights.