Here's what we know about the first half of 2009:
1. Emerging markets and commodities have been on fire
2. Developed market benchmarks are decidedly mixed, with the Dow negative and the Nasdaq positive
3. Most assets have moved sideways since May 4
Yet there are other ways to look at the "genuineness" of the market's '09 goodwill. The folks at ETF Investment Outlook like to look at price breadth, also described as the number of stocks advancing minus the number of stocks declining.
For example, the SPDR S&P 500 Trust (SPY) may have lost 0.5% in a particular day, but that wouldn't tell us how many stocks moved higher or lower. There may have been 300 advancers with 200 decliners, which denotes positive price breadth.
Of course, one day does not a particular trend make. A more meaningful representation of stock price direction is often arrived at by evaluating price breadth over a period.
For instance, we can use moving averages of advancing stocks and declining stocks in ETFs for 6 months (120 trading days). An advance/decline net % that is higher than the 120-trading day trendline might portend a more vibrant future than an A/D net % that is below the 120-Day SMA.
So let's cut to the chase. Which ETFs have decidedly positive price breadth... and which ETFs have decidedly negative price breadth?
|Q1 and Q2 Positive Price Breadth for 2009|
|A/D Net % Above 6-Month Average|
|Market Vectors Steel (SLX)||8.1%|
|PowerShares Networking (PXQ)||6.3%|
|PowerShares Energy and Exploration (PXE)||5.4%|
|iShares Dow Jones Materials (IYM)||4.8%|
|iShares Goldman Sachs Networking (IGN)||4.6%|
|A/D Net % Below 6-Month Average|
|DJ Real Estate (IYR)||-3.9%|
|iShares Financial Services (IYG)||-4.7%|
|Dow Jones Transportation (IYT)||-6.2%|
|SPDR Homebuilders (XHB)||-6.7%|
|iShares Dow Jones Regional Banks (IAT)||-8.7%|
In a simple statement or two, one might say the following: The majority of stocks in the tech, materials and energy exploration arenas are rising. Meanwhile, the majority of stocks related to home-building, home financing and banking are falling.
Reflecting the dichotomy is the fact that the S&P 500 is truly split down the middle between advancers and decliners. While the index itself may have managed to post a modest gain of 1.8% through 6/30/09, the S&P 500 SPDR Trust (SPY) is at 0% with respect to its 6-month A/D Net %.
Looking back at the tail end of the 2003-2007 bull market, financial stocks, REITs and homebuilders were already feeling the pain. The question at the time was, could the bull market continue in spite of real estate and subprime? The world learned the answer the hard way.... NOPE!
Now we're looking at a situation where most of the advancers come from basic industries a la materials, resources and energy exploration. These were the last to fall in 2008, but they represent the early risers in 2009. In contrast, the strugglers are not leading the way forward even if they are decidedly better off than they were 3 months ago.
Will the ETF rally continue? It may, in select segments and regions. However, we'll need a more definitive picture about the future of finance and the future of real estate before a broader ETF rally can send the bear back into hibernation.
Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.