Monday, May 05, 2008

Indicator Review for May 5th

Last week's indicator review found strength in the stock market, but also selectivity within that strength. That view was most recently supported in my look at sector rotation within the market rise. While we've continued to see rising prices--and firming of many of the indicators--the gains in some sectors (technology, financial) have been at the expense of others (materials, energy).

We can see from the top chart that the number of stocks registering fresh 20-day highs minus lows has remained firm as the market has moved higher. The selectivity, however, is evident in the new 52-week high/low numbers. Among NYSE common stocks only, Friday's move to new price highs saw only 59 issues making fresh annual highs and 11 making new lows. We had over 100 new highs three weeks ago. Many of the issues that were making fresh highs at that time (commodity-related stocks) have since retreated.

We've also seen firming in the Cumulative NYSE TICK (bottom chart), but that, too, has lagged as buying sentiment has been selective. Demand/Supply numbers, while positive on Friday, were relatively modest as well, suggesting that upside momentum is waning. It would not surprise me to see a modest correction this week prior to any important resumption of a bull move.

That having been said, it's important to stress that, on the heels of the drying up of selling noted in prior indicator reviews, we are seeing positive money flows into stocks and an increase of strength in the market this past week. 52% of S&P 500 issues are now trading above their 200-day moving averages, and 77% are above their 50-day benchmarks. Those are both the strongest readings of 2008. The percentage of issues above their moving averages typically tops out ahead of price in any intermediate-term bull move, which suggests that we are likely to see further gains after any pause/correction in the recent rally.

As I recently explained, I do not see this as a vigorous bull move and, for that reason, am not expecting a fresh bull market to take us to all time highs. Still, an important bottom was put into place during the January-March period, and I need to see distinct weakening of the indicators before assuming that the recent market strength will reverse in any meaningful way.