Last week's indicator review noted short-term weakness, but a longer-term pattern of market strength. With the drying up of selling early in the week, we saw buyers return to the market and push the major averages above long-term resistance. The number of stocks registering fresh 20-day highs moved higher, but did not expand above levels from early this month (middle chart), but we did see a significant expansion of stocks making fresh 65-day highs. The reduced number of new lows during market weakness and the expansion of new highs suggests that the market has been gaining strength.
That having been said, I can't say the picture is entirely rosy for the bulls. The Cumulative Demand/Supply Index (top chart) has touched an overbought level (+30), which has corresponded to subnormal price gains 20 days out. In a market gaining strength, that doesn't necessarily mean we'll see a major price reversal, but it does often lead to a period of consolidation and choppiness.
A little more concerning is the relative weakness of the Cumulative NYSE TICK line, which is not confirming its early April highs to this point (bottom chart). A similar picture is painted by my work on money flows into Dow Jones Industrial stocks. While Friday gave us the highest dollar inflows of 2008, the five-day flows are only barely positive. I will be watching the TICK line and dollar flows very carefully. A retreat from current levels and a price move of the major stock indexes back into their long-term trading range would call this past week's bull move into question and, indeed, target a return to the midpoint of that range.
Other indicators generally confirm the bullish action from the past week. As I mentioned in a recent Twitter post, we're now seeing 68% of SPX stocks trading above their 50-day moving averages, up from a little over 40% last week and 10% at the March bottom. We have to go back to October, 2007 to find a stronger reading. Similar readings are found among the broad list of NYSE stocks.
Furthermore, the advance-decline lines specific to the NYSE common stocks and the SPX stocks held their March lows last week and now have moved to multi-week highs. Also hitting multi-week highs is my measure of technical strength, with 3/4 of all stocks in my basket now trading in uptrends.
The all-important trading issue is whether the break above long-term resistance was genuine or whether it will turn out to be a false breakout trapping the bulls. While a good deal of evidence suggests that the move is for real, those on the sidelines may want to look for continued strength in the NYSE TICK and the money flow numbers before chasing price highs in a market that's becoming overbought.
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