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The Word: February 8th

Another weak day for the stock market, with the market cap weighted average moving up just 17 basis points, and the median return just 14 basis points. What does the recent drop in volatility mean for the health of the market? Can a bull market survive tallying up mere basis points at a time?

The Facts

While the market seemed off to a rough start, quickly falling off its opening highs, it quickly recovered and the dip proved to be the low for the day. Activity was roughly equal to yesterday's dollar volume at 109 billion dollars, still low on a 30 day average basis. While the Dow Jones squeaked out a mere four basis points at the days close, the common stock issues equal weighted average ended up over 28 basis points, displaying a bit of strength in small and mid-caps over the mega-cap stocks of the Dow.

Dollar volume weighted averages on the day were surprisingly healthy, netting a near 60 basis point return for common stock issues and 52 basis points for the broad market. This average was pulled up by high kurtosis to the positive, with a fairly high dollar volume weighted kurtosis of 19.8 to support this visualization.

The larger kurtosis not only causes more returns to be extremely large, but also less to be small, giving the distribution a "skinny center" shape. While larger than the past few day's trading, the kurtosis on the day was not incredibly large. Common stock issues experienced a pretty symmetrical distribution, except the trend of most excessive returns falling to the positive side continues.

The Market Range Index dropped slightly, keeping it in its recent range near 80. The recent trend of large drops in supply and moderate gains in demand continued today, with the Daily Bear Index dropping over 6% on the day.

The Meaning

The market continues to offer solid evidence for the case of a continued bull market. While the recent drop in supply is excellent, it is more or less on trend with past movements in the Daily Bear Index since November. It is the recent advance in the Daily Bull Index that is most promising for the health of the uptrend.

The fact that market range has continued to stay level is also a health sign. While a small rise in the index is not to be feared, particularly if volatility begins to pick up, it is the longer term trend of the index that confirms movements in the stock market. The Market Range Index continues to stay at levels that is associated with healthy market convergence.

Defensive sectors fared the worst today, while financials and information technology lead the advance. The underlying strength of the information technology sector is evident in its scatter plot showing dollar volume vs. returns.

This chart shows that information technology's performance was backed by its strongest performers also generally receiving the largest dollar volume.

The Word

Despite the market ticking in only minor movements over the past few days, its internals are showing more health than most indices are displaying. Whether the cause of the rally is investor indecision, ignorance, or solid fundamentals is beyond our concern. We simply measure the stock market fundamentals and read the story that is told through its data.

It is possible based on the strength that is beginning to emerge that these small movements is a small consolidation phase, allowing the market to settle near overbought levels before regrouping for another surge.

But then again we continue to anticipate resistance ahead from several indices approaching major highs. This anticipation is based purely off index price movements, and thus we do not recommend action in anticipation of this resistance as the data does not display signs of a nearing correction.

R. Thomas Research