Monday, June 02, 2008

Indicator Review for June 2nd

Last week's indicator review noted weakness across many of the measures in the wake of a several-day pullback. We've since bounced from those price lows, but remain well off the highs across most of the indicators. Money flows to the S&P 500 stocks continue to be weak, with divergences common since April.

Interestingly, the money flow divergences match what we're seeing in the cumulative NYSE TICK (bottom chart), which has shown tepid strength since its peak on April 7th and which is currently well off its highs. Unlike money flow, TICK is not volume based, suggesting that we're not just seeing waning summer volume. Rather, buyer interest itself seems to be waning since that early April period.

Still, that did not prevent us from making fresh peaks in the number of stocks making new 65-day highs (top chart) during May. Since the pullback two weeks ago, the market's bounce has left us well shy of those peaks so far. On Thursday and Friday, for example, we registered 48 and 57 new 52-week highs respectively across the NYSE common stocks against 16 and 18 new lows. By comparison, we had over 150 new highs two weeks ago.

In past indicator reviews, I've noted considerable sector rotation and divergence, even within the S&P 500 large-cap universe. This continues at present and appears to be a major reason we're not seeing more broad-based strength since the January/March market bottom. For example, we're only seeing 30% of financial stocks trading above their 20-day moving averages, but 78% of technology stocks. Materials issues have shown recent weakness in the wake of pullbacks among commodities--only 54% are above their 20-day averages--but previously weak health care issues have bounced, with 73% above their benchmarks.

All in all, the weakness in TICK and money flows and the relative performance of sectors suggests two things: 1) that more money is shifting from sector to sector than actually entering the stock market; and 2) that when money is entering the market, it is doing so selectively (commodity-based themes, technology). This is not necessarily a prescription for a fresh bear market, but it also is not a solid foundation for a sustained market rally. For this reason, as my recent post indicated, I am being more tactical than long-term strategic in my own trading.