Thursday, April 30, 2009

A Longer Timeframe Picture of Stock Strength

Shout out once again to one of my favorite sites, Decision Point, which tracks the percentage of NYSE stocks trading above their 200-day moving averages. It is common to see this percentage top out ahead of price during cyclical bull markets, generally reaching an "overbought" peak of 80-90%. We can see that the percentage topped out in early 2007, well ahead of price later that year. By the time we made a price high, the percentage of NYSE stocks trading above their 200-day moving average had broken into the 60s.

Note how the percentage bottomed well below 10% at the March lows, but has been climbing steadily since then. While the market is registering "overbought" readings on a shorter time frame, the percentage of NYSE issues above their 200-day moving averages--at around 30%--is nowhere near "overbought" levels. It is but one of quite a few indicators that I've highlighted--the advance/decline line, the Cumulative TICK, the number of stocks making fresh 65-day highs--that continue to make new highs during the recent market upswing. That reflects a situation in which price corrections to date have been relatively brief and mild. Should we begin to see divergences among these indicators, I would expect a more substantial correction.

It is interesting to see the patterns of stocks closing above their 200-day moving average as a function of sectors. Of the Consumer Discretionary stocks, fully 56% are above that benchmark; we also see 49% of Technology shares and 36% of Materials stocks above their averages. This relative strength suggests that stocks with growth themes, from discretionary spending to tech to raw materials, are driving the recent rally. I will be watching the relative performance of these sectors going forward, as they provide a useful sentiment gauge.