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Tech has been lagging since July 29 when the Nadsaq rolled over (or began to underperform) relative to the S&P 500®.

Source: Helene Meisler as of August 11, 2009.

The Nasdaq ceased to outperform the S&P 500 the week of August 3. You need a magnifying glass to see the rolling over in it now. But it will now take a net differential of 1.9 billion shares to reverse this from down to up (that's up volume minus down volume). Last week the number of stocks making new highs was unimpressive on the Nasdaq. There were about half of the number of stocks making new highs as the last time the Nasdaq was at this level.

Source: Helene Meisler as of August 14, 2009.

Note: In the chart above, the left axis is the number of stocks on the Nasdaq making new highs (represented by the bars) while the right side is the level of the index (blue line).

I wouldn't exactly call Nasdaq oversold but I would note that breadth has been negative on the index (there are more negative-performing stocks than positive-performing stocks) for several days out of the last few weeks. That means at least it is heading toward an oversold condition, in my view. Or if you prefer, we're working off the overbought condition.

Let me be clear on this: I think Nasdaq and tech have had their great run and will embark on a longer-term period of underperformance. However, in the near term when too many investors are on the same bandwagon, I think it's time for the market to surprise them and trend up.

The oil stocks stopped participating in the rally the same time technology did.

Source: as of August 10, 2009.

So what it means is that tech and oil stocks both appear to have peaked almost three weeks ago. Are financials the only thing keeping us going now? The Bank Index has been superb and, relative to the S&P, financials have rallied strongly.

Source: Helene Meisler as of August 14, 2009.

Note: Chart above depicts the ratio of the KBW Bank Index (BKX) to the S&P 500.

But banks actually looked better in early May following the government's stress test than they do now. In May, the banks made higher highs. This time around, we saw lower highs.

The non-common hitch

In the past few weeks the market has rallied strongly. Some might call it more like a soar than a rally. I thought the market would rally. But I didn't think it would soar. It has certainly gone farther than I believed it would or could.

Breadth as measured by the advance/decline line (number of advancing stocks relative to the number of declining stocks) has been very strong and seemingly continues to be strong. In fact when we look at the chart of the market's breadth and we compare that to the S&P 500's breadth we can see that the S&P is still hovering at the levels it traded in fall 2008 while the breadth of the market is now well above that area.

Source: Helene Meisler as of August 12, 2009.

Note: The vertical axis is the cumulative number of advancers to decliners since the early 1980s.

There is a bit of a hitch with this indicator though. There are now so many non-common stocks listed on the NYSE that this indicator tends to get skewed by all these preferred stocks, foreign stocks, bond funds and so forth. So I sorted through that list and calculated the same indicator using common stocks only.

When we look at this indicator using common stocks only, it's still positive but not by the margin we think it is. In other words, the majority of stocks are not exactly outperforming in the manner in which the published advance/decline line would have us believe.

Source: Helene Meisler as of August 12, 2009.

Note: The vertical axis is the cumulative number of advancers to decliners since the early 1980's.

You can see that the chart with the published advance/decline levels is well above its August 2008 highs (when the S&P was trading at 1,300-ish) whereas the common stocks only are trading more along the lines of when the S&P was around 1,100 in October of 2008. Both are bullish, but they tell two different stories. There are a lot of non-stocks participating that are skewing the indicator to appear more bullish than it is.

The action in the market's breadth does not concern me. What does concern me is the number of stocks making new 52-week highs. The S&P is now trading back where it was last October, so it has yet to make a new 52-week high while the advance/decline line has. Therefore, we really ought to see a lot more stocks making new highs at this point.

Source: Helene Meisler as of August 12, 2009.

Keeping in mind that the published advance/ decline line on the NYSE has so many non-common stocks in it, it's not surprising that the number of stocks making new highs reached 177 on August 3. However, on that same day there were only 30 common stocks making new highs, which was down from the peak reading July 23 of 45.

Source: Helene Meisler as of August 12, 2009.

Note: On the above chart the blue line is the S&P 500 while the bars are the stocks making new highs.

Since the peak reading of 177 on August 3, the published advance/decline line has dropped off quite a bit with the most recent reading close to 50 on August 12. The common stocks are currently at 19 new highs.

In my view, these numbers must begin to improve if this market is to carry on further. A market that rises on fewer and fewer stocks making new highs ultimately becomes unsustainable.

In my view, the technology sector has had its major run and may underperform longer-term. However in the near term, I believe tech is working toward an oversold condition.

Oil has been lagging for as long as tech while the banks have been holding up well; I would not be surprised by a reversal of this trend.

While there may still be a little market rally left, I see a correction in late August, which could lead to soaring negativity in September.