January 20th, 2010
I last took the “pulse” of the market, that is measured its internal health, breadth and depth, on December 17 in “This Damaged Market Is Ready for the ICU“. Just about a month has passed and the S&P has moved marginally higher (3.83%), 56.2% of stocks increased more than the S&P 500 Index and 74.7% of stocks are higher today than they were then.
But what do we know about the better-than-average movers. What we know is that, again, they were predominately low-priced stocks. Of all the stocks that increased at a rate more than the Index, 32.9% were under $5 and half were less than $10 per share on December 16. In addition, what can we say about the momentum of the average stock:
According to these momentum measures, the average stock has more positive momentum today than it had in mid-December. More stocks are making new highs, and fewer are making new lows. More stocks have crossed above their 200- and 300-day moving averages and more stocks have bullish alignments (price>50-dma>100-dma>200-dma>300-dma) than in December. The charts of fewer stocks today than a month ago have the mirror image, bearish alignments of their moving averages (only 166, half as many as in December).
And yet, rather than providing comfort, all this excellent momentum data makes me uneasy. While it just can’t get much better than this, I also feel this great momentum can’t continue forever.
Perhaps it is just what it looks like: a market that’s over-extended and needs to correct (unfotunately, I don’t have this sort of tracking data prior to March, 2009 so there’s no prior correction levels to compare against). These indicators and the market’s price action add weight to the notion that too many stocks have run too far ahead of where they ought to be:
We won’t have to wait much longer to get an answer to the question “Is the market heading into a correction?” We may have just hit the first bump in the road.