Bullish on Breadth, but Troubled by New Highs

All told, the market is probably nearing a correction, but that should lead to another rally.
By Helene Meisler ,

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The most bullish indicator about this market is the breadth, which has been nothing short of excellent. The volume relationship has been good, but not as bullish as the advance/decline line.

Then there are the number of new highs. I can't really complain about the

Nasdaq

, despite big tech's laggards (

Microsoft

,

Oracle

, and others). Breadth and new highs on the Nasdaq have been plugging right along with the average.

The

New York Stock Exchange

is a different story, though. So before I continue with what's good about this market, I'll share with you one indicator that's been bothering me for about 10 days now.

On April 22, the

S&P 500

closed at 911. That day, 194 issues made 52-week highs -- nothing to complain about. Of course, many NYSE securities aren't actually common stocks. For that reason, I keep separate statistics on only the common stocks, and I found something interesting: The number of common stocks setting new highs totaled 104, which was also bullish.

The next day began to trouble me. That day, the S&P rose another eight points and closed on its high for the day. The total number of securities making new highs was 194 again. Why wasn't that good? Because a reading where the new highs indicator doesn't expand is a warning sign that stocks are tired.

I didn't make much of a fuss on April 24 about this indicator, mostly because the common stocks reading tacked on two additional stocks, making that number increase to 106. Not much of an improvement, but at least it was higher than the previous day's.

Then the market milled around for a week and eventually pushed higher. On Friday the S&P closed at 930, but the number of NYSE securities making new highs totaled 179. There's nothing bullish about that. Among the common stocks, only 78 made new highs.

I give this indicator a little leeway because sometimes investors buy what's down because they don't want to chase what's already up. Often this sort of action goes hand in hand with sentiment.

If investors feel they must get on board, they're willing to buy anything, especially what has momentum. But instead it seems they're searching for what hasn't yet moved, which makes them grudging bulls. And we see that still in the sentiment indicators.

Sentiment has been getting more bullish, but slowly. Unlike all of the previous rallies we've seen in the past year-and-a-half, where investors jumped on the bull bandwagon fast, this one's been plodding. The sentiment readings still aren't at extremes, although there's no denying investors aren't as bearish as they were.

In short, breadth is fine, the number of new highs isn't, and sentiment, while getting more bullish, hasn't reached an extreme reading yet. That continues to add up to a market that should correct, but a correction would still lead to another rally.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's

primer.

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Helene Meisler, based in Shanghai, writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback and invites you to send it to

Helene Meisler.

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