Sunday, December 04, 2016

This Stock Market is a Market of Stocks

The above chart of sector performance over the past three months from FinViz really is quite remarkable.  There have been big moves during this recent period, but the moves have been very different across the sectors.  If you have been long industrial conglomerates and commodity-related shares, you've likely done well.  If you have been long consumer staples shares, healthcare issues, or utilities, your returns have been significantly negative.

Here's another interesting perspective, courtesy of the excellent Index Indicators site.  As of Friday's close, we had 48% of SPX stocks trading above their three-day moving averages; 43% above their five- and ten-day averages; 58% above their 20-day averages; 60% above their 50-day averages; 54% above their 100-day averages; and 61% above their 200-day averages.  In other words, at every time frame, there have been a large proportion of stocks you could identify as weak or strong purely on a moving average basis.

In short, we've had less of a true stock market than a market of stocks.  

From a cycle perspective this is important, because the bull and bear phases of cycles are characterized by trend and momentum.  When we are in a true bull or bear market move, the tide tends to lift or lower all boats.  When markets spend significant time topping or bottoming, we see a meaningful degree of rotation, with the stronger and weaker sectors diverging in performance.  

It is not clear to me that the moves off the election evening lows represent a fresh bull market in stocks.  Yes, we did see significant share creation in the SPY ETF after the election; this has leveled off and even dipped a bit since mid-November.  And, yes, we did see an expansion of the number of stocks making fresh 52-week highs following the election.  That has leveled off in the past week, but interestingly 100-day new highs minus lows among the SPX stocks only hit 94 at their recent peak, below levels seen off the late June bottom.  Much of the breadth strength in the aggregate market numbers are a reflection of relative strength among small caps and mid caps.

As long as that aggregate breadth stays positive, with few shares actually registering fresh new lows, I don't expect any major near-term corrections or transition to bear market conditions.  When I see all ships not rising, however, I question the tide.  End of year performance dynamics for fast money participants have led markets to price in a significant degree of expectation for the new Presidential administration.  I am watching breadth statistics carefully to handicap the odds of continuation versus consolidation, and I'm carefully tracking the relative performance of the strongest and weakest sectors to determine the staying power of the post-election themes.

Further Reading:  The Momentum Curve