Stock market’s ‘internals’ suggest rally has a ways to go

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Many investors have been waiting for some kind of significant pullback in stocks. They may have to keep waiting.

An analysis by well-known market research firm Ned Davis Research suggests the spring rally still has room to run, even with the Standard & Poor’s 500 index up 39% since March 9.

The firm examined the S&P index’s 138 industry groups to determine how individual stocks and sectors were performing compared with the index itself.

Industry sectors were measured on an ‘equal-weighted’ basis, meaning that small stocks counted just as much as larger ones. That assured that price changes in a handful of huge stocks wouldn’t overshadow the performance of scores of smaller issues.

Ned Davis found that 88 S&P industry groups are in strong uptrends relative to the overall index. Thirty one are in downtrends, while 19 are neutral.

The S&P historically has continued to rally solidly during periods when as many as 88 groups were moving up, the firm said. And when the number of groups in uptrends has been rising, as it has recently, the market’s performance has been even better.

Simply put, the breadth of the advance is a sign of internal market strength. Even as some stock sectors may be stalling or reversing, money is quickly shifting to other sectors.

‘We are positive on the stock market based not only on this indicator but others that show that when so many sectors and sub-industries and individual stocks are participating in a rally, the market continues to do well,’ said Ed Clissold, Ned Davis senior global analyst. ‘It’s when fewer and fewer are participating that we become worried that the rally is getting tired.’

Clissold notes that his firm still believes that stocks are in a long-term bear market. But within such ‘secular’ bear markets, short-term ‘cyclical’ bull markets can produce heady gains.

‘We are concerned that the cyclical bull market could be in jeopardy late this year or early next year, but we will let our indicators guide us as to when we reduce our equity allocation,’ Clissold said.

‘As of right now, we’re in the early phases of the bull-market rally,’ he said.

-- Walter Hamilton