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Wednesday, July 3, 2013

This Bull Market Has Taken an Unusual Turn

Nasdaq Times Square_1106
Nasdaq Times Square_1106 (Photo credit: gmacfadyen)
Lower quality stocks seldom lead the market higher, but that's what appears to be happening now


Meanwhile, here at home there were worries over Friday’s jobs data, and higher oil prices kept a lid on a possible rally. August crude oil futures rose 1.6%, settling at a new 52-week high.
At Tuesday’s close, the Dow Jones Industrial Average was off 43 points at 14,932, the S&P 500 fell 1 point to 1,614, and the Nasdaq fell 1 point to 3,433. The NYSE traded 716 million shares and the Nasdaq crossed 416 million. On the Big Board, decliners outnumbered advancers by 1.6-to-1, but the Nasdaq was almost a breakeven.

Chart Key
Both the Nasdaq and Russell 2000 have closed above their 50-day moving averages on successive days. This bullish sign was accompanied on both charts by a buy signal from their MACD indicators. However, both have thus far failed to penetrate the near-term bear channel that began with the May 22 highs.
Conclusion: While the more senior indices (Dow, S&P 500, NYSE Composite) have remained range-bound by failing to close above their respective 50-day moving averages, the lower quality indices have successive closes above the barrier. This unusual development was accompanied by buy signals from their MACD indicators.
This is a unique pattern in that bull markets are most often led by the quality stocks, not speculative stocks. When buyers price the blue chips beyond reasonable P/E multiples, they turn to the lower quality stocks and recycle them to an overpriced level. Then the cycle begins again as the market “rotates” or focuses on underpriced quality stocks, and again down the quality list to the underpriced, more speculative issues. In other words, lower quality stocks seldom lead the market higher, which is what appears to be occurring now.
On balance, this is a bullish phenomenon as long as the Dow, S&P 500 and NYSE catch up with the flow of money now going into the specs. Again we focus on the ability of the quality equities to pierce their 50-day moving averages. Without the “big boys” of the Dow, it is not likely that we will see a broad-based breakout soon. ...
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