Friday, June 22, 2007

Catching Up With The Stock Market: Part Two - Strength and Momentum

My last post looked at money flows among the Dow stocks and found a generally positive, though moderating picture of funds being committed to equities. When we look at strength and momentum, we're examining how broadly those inflows are being committed.

Note in the chart above that the number of stocks making fresh 20-day new highs vs. lows among the NYSE, NASDAQ, and ASE issues has been making lower highs since April. Indeed, going back to May 1st, we've seen approximately equal numbers of new 20 day highs and new 20 day lows.

Thursday's market closed not so far from bull market highs, but we had 559 stocks make 20-day highs against 1226 new 20-day lows. The picture was similar with momentum: my Demand measure (index of stocks with significant upside momentum) ended Thursday at 59; Supply (indicator of stocks with significant downside momentum) was 91.

What that says to me is that the moderating dollar volume flows noted in the most recent post are translating into greater selectivity during market rises. Bullish money flows, in short, exist, but they are directed toward a narrower base. The rally, as a result, is more selective.

Among S&P 500 stocks, we registered only 13 new 52-week highs on Thursday and 43 the day before that. We're well off peak new highs from the end of May/very early June and well off the April peaks. Among S&P 600 small cap issues, we had 12 new 52-week highs on Thursday and 11 new lows.

Perhaps most tellingly, across all exchanges, 664 stocks made fresh 65-day lows on Thursday, against only 332 new highs. That tells us that many stocks are in correction mode, even as the market churns with dollar flows near the 200-day average. Only 59% of S&P 500 stocks are above their 50-day moving averages, down from over 85% in April. Similarly, only 55% of S&P small caps are trading above their 50-day averages as of Thursday, well down from April and May peaks.

My initial take on all this is that we've been in a corrective mode since April, but it is a correction that is more extended in time than price. Sectors that are interest rate and housing sensitive have lagged; energy issues continue to shine. I do not see evidence at this time that the correction is over; nor do I see evidence that it will become a full-fledged bear move.

This weekend I will update the Weblog and track further indicators and see if we might find some historical edges in any of these observations.