What you should know about this bull market
We began 2006 on a
bullish note, with most major averages making new highs for the bull
market. Many averages, including those for small and mid cap stocks, as well as
the broad NYSE Composite, rose to all-time highs. With much of the gains of
2006 erased by Friday across both the S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating) and NASDAQ 100 Indexes
(
NDX |
Quote |
Chart |
News |
PowerRating)
–and such market leaders as Google
(
GOOG |
Quote |
Chart |
News |
PowerRating), Yahoo
(
YHOO |
Quote |
Chart |
News |
PowerRating), and the oil
sector
(
XOI |
Quote |
Chart |
News |
PowerRating) in seeming retreat–doubts are beginning to surface regarding
the health of the bull.
Below is a chart of weekly new highs minus new
lows for the NYSE. The chart covers the period from January, 2003 through this
past Friday. Notice two interesting facets of the chart, highlighted by the red
arrows. First, it is clear that the bull market has been becoming a more
selective affair over time. Although we made new price highs across most
indexes early in 2006, the number of stocks making fresh 52 week highs on a
weekly basis actually declined from the peaks of 2005. Second, and equally
important, we have not seen any sustained increase in the number of issues
registering 52-week lows. Although a large number of stocks are not
participating to as vigorously to the upside as they did in 2003 and early 2004,
that doesn’t mean that they are increasingly participating to the downside. By
exclusion, those issues are range bound.
Â
Â
We’ve been here before. The tech market leaders
from the previous bull market peaked out early in 2000 and began a precipitous
decline, but the Dow Industrials continued in a range, bumping up against their
early 2000 highs into May of 2001. This makes sense, as the speculative leaders
of the bull market give way to defensive stalwarts once economic problems come
to the fore. This topping process–one of transition from market offense to
defense–can take a considerable period of time, as we saw during the previous
cycle. If we are indeed seeing such a transition, astute traders and investors
will need to reorient their thinking, fading recent market leaders and
emphasizing companies likely to weather economic storms. We do not know where
the next storm will come from; there is no lack of candidates given rising
deficits, interest rates, and commodity prices; Middle East tensions; and
renewed outbreaks of avian flu. What we do know if that bull markets become more
selective over time, rising to new highs until the issues with relative strength
can no longer form a critical mass sufficient to keep the indexes aloft. This is
a natural development in an aging bull market, and it poses opportunities as
well as risks.
Brett N. Steenbarger, Ph.D. is Associate
Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com and a
blog of market analytics at
www.traderfeed.blogspot.com. He is currently writing a book on the topics
of trader development and the enhancement of trader performance.
Â