Poor Consumer Sentiment Underlines Poor Participation In Market Highs

Includes: DIA, SPY
by: Dr. Duru

The latest consumer sentiment numbers from Thomson Reuters/University of Michigan hit a 16-month low, perhaps revealing more concern with the economic/political gridlock in D.C. than the market is showing. Indeed the poll shows that "a record 34 percent of respondents made unfavorable references to government economic policies, beating January's prior record of 31 percent." It is always difficult to make projections from the consumer sentiment numbers since the actions of consumers will often contradict their claims. However, in this case, perhaps what lies underneath the covers of the market's race for all-time highs confirms the poor participation in what should be a time of euphoria.

I do not pay much attention to the Dow Jones Industrial Average (NYSEARCA:DIA) and greatly prefer the S&P 500 (NYSEARCA:SPY) as being more representative of the stock market. However, anyone with a pulse has likely heard or read the breathless headlines about the Dow's all-time highs.

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An impressive recovery from historic lows to all-time highs in just four years

The Dow is now up ten days in a row, a feat not seen since 1996. Yet, as Art Cashin remarked on CNBC, this is a rally without joy or enthusiasm. Bears may call this catatonic state complacency; contrarians may delight in this mood as it could demonstrate the market is far from the euphoria that usually marks tops. What I have noted is that not even stocks are participating in this euphoria in a broad sense.

First of all, of the 30 stocks in the Dow, only 10 are hitting all-time highs along with the index. Those stocks are 3M Company (NYSE:MMM), American Express (NYSE:AXP), Chevron Corporation (NYSE:CVX), Home Depot (NYSE:HD) {marginally}, International Business Machines (NYSE:IBM), Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), Travelers Companies (NYSE:TRV), United Technologies (NYSE:UTX), and Walt Disney Company (NYSE:DIS). Caterpillar (NYSE:CAT) gets special mention because it made new all-time highs in 2011 but has since sold off over 25%. The divide between these star performers and the rest of the pack is relatively wide. Stocks like Aloca (NYSE:AA), AT&T (NYSE:T), Bank of America (NYSE:BAC), Cisco (NASDAQ:CSCO), General Electric (NYSE:GE), Hewlett Packard (NYSE:HPQ), Intel (NASDAQ:INTC), Merck (NYSE:MRK), Microsoft (NASDAQ:MSFT), and Verizon (NYSE:VZ) are nowhere near their all-time highs, constituting another 1/3 of the index.

This dichotomy can be seen in the general market. An indicator I like to follow is the percentage of stocks trading above their 40-day moving averages (DMA). In FreeStockCharts.com, it is called T2108. I follow this index closely in my T2108 Updates. Currently, T2108 is at 63%. This means that almost 40% of stocks are trading below their 40DMAs. These are all stocks nowhere near their all-time highs. Typically, during a strong rally like the current one, T2108 moves into "overbought" territory which is 70% or higher. With the S&P 500 a mere few points away from its all-time high, I would have expected T2108 to be closing in on 80% or more. Instead, it seems a good number of stocks are getting left behind.

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T2108 is showing a lack of enthusiasm (red line marks overbought, blue line marks oversold)

Note that when the stock market exploded higher to start the new year, T2108 went as high as 85%. The 20 percentage point differential between then and now, represents a large number of stocks whose performance has sharply diverged from that of the S&P 500 (or stock market in general). This setup provides a very good reason to hold the enthusiasm or joy: the lofty heights are not getting broadly shared.

Currently, T2108 has bounced between 60 to 65% since March 5th. The S&P 500 is up a mere 1.3% since then. Without more participation, the S&P 500′s rally should continue to lack luster. I will be looking to see whether T2108 can break out and finally join the S&P 500 in its upward climb. Until then, I will continue to assume that the rally is at high risk of an imminent correction.

Be careful out there!

Disclosure: I am long CAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.