Take a Look Inside the Stock Market

Today, I want to give you a glimpse inside the stock market.  We are most definitely in a correction - a multi-month correction - that started as long ago as November of last year in many stocks.  Take a look at the chart below.

Click to view larger image.

In the chart above, you can see that the percent of stocks trading above their 50-day moving average (orange line) has seen lower highs since the fall of last year, while at the same time, both indices have seen higher highs.  This divergence is important to take note of.  Also, here's a good view of how the 900 stocks in the S&P 500 and S&P 400 are acting relative to their moving averages as of yesterday's close.

In our view, you can pretty much ignore Telecommunication and Utilities stocks in this correction, but on the other hand, you don't see Utilities at the top of this list UNLESS you are in a defensive market.  This IS a defensive rally.  But why is this?  I believe we're in the stage of an economic recovery where the Fed has put huge reserves into the system, but the banks have not been using those reserves  for lending to fuel productive economic growth.  So, based on the table above, the defensive sectors are currently leading the pack.

Here's our bottom line.  Our Asset Allocation Model tells us that we are still in a very powerful and dramatically undervalued bull market.  However, with our Psychology Composite still at P5 (the next to worst level), we're getting the message that the market needs to repair those little cracks in the "Wall of Worry."  So, a correction would be the best thing this market could have to sustain its length and strength. 

Don Hays

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