Stock market strength fades
A narrowing of breath suggests buyers are finding fewer bargains, a sign that lower prices are needed.
While stock prices have made little progress over the last two months, a key measure of the market's internal strength is fading. Breadth, or the number of stock that are participating in the uptrend, has moved to the lowest levels seen since August. Yet despite this, the Dow Jones Industrial Average (INDU) continues to trade at levels first seen in mid-October.
This is unsustainable -- like a house with a crumbling foundation. As investors become more skittish, with concerns over Chinese inflation, Korean artillery fire, and European bailouts, they increasingly focus on the best performing stocks. The laggards are ignored. But eventually, are an increasing percentage of issues halt their advance and turn lower, the broad market indices will follow unless buyers reengage.
Today, breadth measured moved to fresh lows. Of the 30 Dow components, just three stocks remain in uptrends as defined by their 9-day average being above their 18-day average. Here they are, along with a look at the recent losers:
The three holdouts are: Intel (INTC), Caterpillar (CAT), and Coca-Cola (KO). Intel's rally looks particularly vulnerable, as shown in the chart above, with its 9-day average now sitting right on the 18-day average. A close beneath $21.20 will be enough to put the tech giant among the laggards.
Recent rollover credits go to Disney (DIS) and Exxon Mobil (XOM), both of which lost their uptrend on Friday. A couple of days before that, McDonalds (MCD), Chevron (CVX), and JP Morgan (JPM) moved lower. The weakest links include healthcare giants Pfizer (PFE) and Merck (MRK), both of which started moving lower on October 29.
The last time this breadth measure dropped below 10% was back on August 23 and remained at that level for eight days before recovering. During the decline back in May, breadth moved below 10% for 23 days as the Dow went on to lose more than 9%.
On a positive note, a few Dow components look like they may be perking up. American Express (AXP) has moved above its 9-day and 18-day averages for three out of the last four trading sessions. Industrial conglomerate United Technologies (UTX) has shown similar strength. These are the types of moves that are needed to initiate fresh up trends.
Despite this, the overall trend remains down. Until we see a day-over-day improvement in the percentage of stocks in established up trends, I would avoid the equity market.
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These hot movers could rise by double digits in coming months.
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