Some Cracks in the Bull Market's Foundation

Though the major large cap indexes have made fresh bull highs in October, some stock groups have been languishing and failing to register new highs. Those include the Russell 2000 Index stocks (IWM; top chart); insurance stocks ($KIX; second chart from top); industrial stocks (XLI; second chart from bottom); and raw materials stocks (XLB; bottom chart). We also see some stock group barely registering highs and now struggling to maintain those, including banking stocks ($BKX) and semiconductor issues (SMH). Midcap shares (MDY) have also failed to make fresh bull highs in October, as have homebuilder stocks (XHB).

On September 16th, we saw over 2300 stocks across the NYSE, NASDAQ, and ASE register fresh 65-day highs. That number hit 1470 on October 14th and 1238 on Monday. This suggests a narrowing of participation in the rally, which I currently interpret as part of an extended topping process following from the momentum highs of September. As a rule, the more extended the period of topping, the more significant the subsequent correction. While I don't expect this to end the bull market that began in March, I believe we could see a healthy pullback from recent strength.

Comments

[User 503206:]

vix at 20 and oil $82 will surely correct the market! When oil is back at $68 and vix at 30 we can buy back in. That might be at S&P 1020!

Oct 21 04:41 PM

[Roger Knights:]

"... we can buy back in. That might be at S&P 1020!"

Or Dow 1020.

Oct 21 04:52 PM

[Mistrofan:]

This types of "flattenings" are normal after period of surges from the bottom. Check the history. I wouldn't be surprised if for the next 3-4 months the American markets will go nowhere. But I would certainly be surprised to see them down more then 3%.

Oct 21 06:56 PM

[Moon Kil Woong:]

Stimulus money is still on the way. I suspect that the market will hold it's breath until it's widely distributed. Then in 2010 we will start to ask, what comes next. That's when questions like can' we blow an evern bigger hole in our fiscal boat with more deficit spending will come up along with if we don't isn't this rally just a short term government and Fed induced mirage backed by easy money and a depreciated dollar.

If you were wise you would ask yourself this today, but don't expect the market to react to such insightful analysis. It usually needs a catalyst to crystalize its thinking.

Oct 22 04:07 AM

[Spartacuss:]

Annnnd, the catalyst just might be....more defaults on commercial and home mortgages and a lack of real profits by the companies whose stocks are waaaay overbought. As the Chinese say, "no tickee, no laundry", and the recovery ticket is: consumer purchasing power, and it ain't there.


On Oct 22 04:07 AM Moon Kil Woong wrote:

> Stimulus money is still on the way. I suspect that the market will
> hold it's breath until it's widely distributed. Then in 2010 we will
> start to ask, what comes next. That's when questions like can' we
> blow an evern bigger hole in our fiscal boat with more deficit spending
> will come up along with if we don't isn't this rally just a short
> term government and Fed induced mirage backed by easy money and a
> depreciated dollar.
>
> If you were wise you would ask yourself this today, but don't expect
> the market to react to such insightful analysis. It usually needs
> a catalyst to crystalize its thinking.

Oct 22 07:29 PM