Tracking This Market Turnaround

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 |  Includes: DIA, QQQ, SPY
by: Brett Steenbarger

We have bounced solidly off the market lows; Friday saw 865 new 20-day highs across the three exchanges, against 499 new lows. To give an idea of the magnitude of the turnaround, I looked at the 40 stocks in my basket and their Technical Strength (a quantification of trending). Interestingly, only 3 stocks are technically weak, 9 neutral, and 28 strong--quite a reversal of the weakness we had been seeing. Here's how it shapes up, sector by sector:

Materials: +120
Industrials: +100
Consumer Discretionary: +240
Consumer Staples: +180
Energy: +160
Health Care: +260
Financials: +180
Technology: -60

TOTAL: +1180

What is perhaps most fascinating is how one of the strongest sectors (technology) is now the weakest and how two of the weakest sectors (consumer discretionary, financial) are now stronger.

Meanwhile, we continue to see healthy upside momentum. My Demand/Supply measure, which is an index of the number of issues closing above the volatility envelopes surrounding their moving averages, was once again highly skewed to the bulls.

Demand was 158 on Friday; Supply was 51. We're now seeing 44% of S&P 500 stocks trading above their 50-day moving averages, up from 20% at the market low. Small caps continue to lag, as only 33% of the S&P 600 stocks are above their 50-day MAs.

At least in the large cap indices, we appear to be in a wide trading range defined by the bull market highs and the August lows. Risk aversion in the credit markets has not disappeared, and we continue to see large caps outperforming the broad market.

We are seeing signs of an accommodative Fed, however, and that has been an important ingredient in getting us out of jams in 1987 and 1998. It may, however, also be an ingredient in causing further dollar weakness and further bubble-like strength in commodities--a situation that cannot bode well for inflation and eventual Fed restraint.