Tuesday, December 11, 2007

A Review of Market Indicators Ahead of the Fed

* Advance-Decline Review - The Advance-Decline line specific to the NYSE common stocks is at a lower high relative to October. October was also at a lower high relative to July. We've additionally seen lower lows over that period. This clearly reflects the relative weakness of the small and mid-cap stocks. The pattern is a little different in the advance-decline line for the S&P 500 stocks, where we see the lower highs, but also a higher A-D Line low at the end of November. This fits with the observation from my prior post regarding relative strength among large caps during the recent decline. When we look at the advance-decline line specific to the NASDAQ 100 stocks, we see a pattern of higher highs and higher lows. The line for the Dow 30 stocks not only shows higher highs and higher lows, but has already hit a bull market peak, having more than retraced the losses from October. The advance-decline line for the S&P 600 small cap stocks is in a clear downtrend, having hardly budged from its recent lows. All in all, this tells us that we're in a very selective (and probably latter) phase of a bull market.

* New High/New Low Review - If we look at 52-week highs and lows among the NYSE common stocks, we also see a pattern of lower new highs and expanded new lows over the course of 2007. On Monday, we saw 102 new annual highs and 9 new lows. In October, we had over 200 new highs; in June/July we had over 300 new highs. Interestingly, this pattern of lower new highs and higher new lows also is present among the S&P 500 stocks. On Monday, we had 34 new annual highs among the S&P 500 large caps, against 5 new lows. We had 70 new highs in October; 90 in July. Among S&P 600 stocks, we had only 16 new 52-week highs on Monday and 3 new lows; in October we had over 40, and in June we had 80 new highs. Despite relative strength in the NASDAQ 100, the same pattern of dwindling new highs is evident. In June we had 24 new highs; in October we had 17; on Monday we had 7. So far this indicator is painting a picture of increasing selectivity over time.

* 20-Day New Highs/Lows - The 20-day new highs/lows continue to show strength. On Monday we had 1628 new 20-day highs and 441 new lows across the major exchanges. As long as we continue to see expanding new highs in the short run, I don't expect a major correction. See my recent post on this topic for a historical analysis. In a nutshell, my primary scenario is for continued near-intermediate term strength in the face of a larger pattern of topping. Given some slowing of upside momentum in the last few days, I wouldn't be surprised to see some pullback from current levels. I also wouldn't be surprised to see such a pullback provide a buying opportunity that enables large caps to test their bull highs.

Much of the recent rally is catch-up action in sectors that had been beaten down. We've seen decent buying among small caps, which is reflected in the very strong NYSE TICK figures (see the Weblog) over the last two weeks. We're also seeing quite nice rebounding among homebuilders and financial stocks. As a whole, however, most of the market evidence for 2007 has suggests a weakening of the broad market over time, even as we've made highs in large cap indexes.