Saturday, May 05, 2007

Dwindling Participation in the Recent Large Cap Rally

As the S&P 500 large cap market (blue line) has steadily risen to new highs over the past week, fewer stocks in the S&P 500 universe have participated in that move. Above I'm tracking the number of 10 day highs minus lows among 40 highly weighted S&P 500 stocks. These are evenly divided among the Materials, Industrials, Consumer Discretionary, Consumer Staples, Energy, Health Care, Financial, and Technology sectors. (See those recent sector money flow posts for the specific roster of stocks.) Note that on Friday, as we hit new highs, there were 9 stocks in the basket making 10-day highs and none making 10-day lows. By contrast, on 4/25 we had 18 fresh 10-day highs and no 10-day lows. It appears that the rally is becoming more selective.

This accords with the data reported in today's Trading Psychology Weblog, which show waning new 52-week highs across several different U.S. equity markets. I don't expect the market to spiral downward from here: money flows remain solid, and we're not yet seeing stocks expanding new lows. Rather, the rally is relying on a dwindling base of strength, and that's generally led to consolidation prior to any fresh bull leg.