November 5th, 2008
I was gratified by and interested in reading the following in this morning’s “The Big Picture” column in IBD:
“After the tech bubble burst in early 2000, the market finally nabbed a follow-through that stuck in March 2003, triggering a multi-year bull market. The early movers in 2003 were largely small cap stocks. Many of those small caps were thinly traded names, the kind that sometimes scare away institutional investors who crave greater liquidity. But after a few mnths of leadership by small caps in ’03, larger-cap stocks with strong fundamentals began emerging, breaking out of bases of their own.”
So I wasn’t far off the mark when I wrote essentially the same thing a couple of weeks ago in “Early-Stage Momentum Stocks” on October 17:
“Market sentiment is in the early stages of switching from negative to neutral. In the accumulation phase of the Market Life Cycle, few reliable chart patterns have developed, most stocks are far from making new highs (one of my favorite criteria for identifying upside momentum), traditional momentum scans offer few candidates and it is still too early for reliable relative strength filters (stocks movement relative to S&P 500). The common denominator of the early leaders in the early phases of the last bull market (2003-2007, as the Tech Bubble Crash was bottoming out), however, were stocks that formed “Golden Crosses” (where the 90-day moving average crossed above the 180-day moving average and closing price higher than both).”
I’ve been scanning for these early momentum stocks and find that their number is growing, expected due to the market’s nearly 18.46% rise over the previous 6 trading session. As of yesterday’s close, the number of stocks that have successfully made “golden crosses” has increased to 262 of which the largest proportion are Banking stocks with 77:
The skeptics among you are probably saying “Ok, so what? More stocks are crossing above their 90-day moving averages and their 90-day averages are crossing over their 180-day. Shouldn’t that happen when the market is going higher?” The answer is that it is relevant because “50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own”, especially during the transitional stage between bear and bull markets. (see April 21).
During these transitional phases, the market may be relatively cheap, but there are few leading industries and even fewer strong stocks. What the market is actually looking for is a change in market psychology and confidence. The best way to see that change is in a variety of indicators that measure the market’s overall health like: advance/decline ratio, new highs/new lows, and the number of stocks making “golden crosses” (among others).
Any of these indicators will also reveal which stocks are the ones leading the market through the transition. Interestingly, many of the 262 “golden cross” stocks are also in the IBD 100 and IBD 85-85 (stocks featured in the papers charts) lists. [They are also currently the source for stocks in the Stock Chartist’s Model Portfolio.]
Send me an email for a spreadsheet for a detail list of the above summary.