Monday, December 7, 2009

Signs the Bull Market is Aging

From the WSJ:

On the surface, things look pretty good in stock land, with indexes on the rise. But when analysts check the engine behind the recent growth, they see things that make them worry.

When stock advances are young and strong, a wide variety of stocks join in, led by smaller stocks that investors hope will respond quickly to an economic turnaround.

Now some of the early gainers are running out of steam, which can be a sign that the bull market is aging. Investors who track indicators like these don't expect significant declines anytime soon, but they are watching for problems next year.

As the Dow Jones Industrial Average and Standard & Poor's 500-stock index, both big-stock indexes, pushed to new highs in the past week, indexes of small and medium-sized stocks haven't kept pace. They have remained below their mid-October highs.

Financial and energy stocks, leaders in the recent rebound, also haven't yet surpassed mid-October highs. Technology stocks, another group of former leaders, have managed only small gains beyond October levels. Stocks that depend on strong economic growth seem to be losing favor, as investors shift toward health-care and telecommunications stocks they consider safer. That shift toward safety is another sign of weakening enthusiasm.

I have made this point several times over the last few weeks(see here and here and here) but it bears repeating. Consider these charts:

The miocrocap index is nowhere near new highs.

The Russell 2000 is nowhere near new highs.

The energy sector is heading lower

The financial sector has yet to make a meaningful advance

The NASDAQ advance/decline line is weakening and

The NYSE advance/decline line is stalling.

Bottom line: fewer and fewer stocks are participating in the rally.