Saturday, January 07, 2017

Rising Markets and Healthy Markets

Friday was an interesting day in the US stock market.  The major averages encountered some early weakness in the New York session, but moved higher in the afternoon and closed at multi-week highs.  Upticks among all NYSE stocks only modestly outnumbered downticks, however, and advancing stocks were actually outnumbered by declining ones.  As we can see from the excellent Finviz graphic, market capitalization was a major driver of the day's action.  Mega cap stocks--the very largest companies--were quite strong on the day, whereas the smallest micro, nano, and small cap shares were down on the day.

A psychologist views the health of a person across the totality of that person's life.  Someone might be successful in the work arena, but suffer a highly conflicted marriage, social isolation, and declining physical health.  That is not what a psychologist would regard as a strong and healthy life.  Conversely, a person firing on all of life's cylinders--work, relationships, personal interests, physical health--is likely to sustain the overall well-being needed for a continued successful life.

So it is in the market.  A rising market that is lifting all boats is a healthy market, and frequently we see further upside momentum from such markets.  That was true at the start of this week, when a broad range of shares participated in the market strength.  Friday was a market firing on one cylinder.  That is not how healthy engines behave.

To be sure, one day does not make a market.  Rather, we look at patterns of sector and capitalization performance to gauge the underlying strength and weakness of markets.  Mid-cap and small cap shares are thus far not confirming recent market strength, as we can see from their charts (MDY; IJR).  Nor are we seeing commensurate strength among such sectors as raw materials (XLB), retail (XRT), consumer staples (XLP), and energy (XLE).  Headlines may focus on Dow 20,000, but my eye is also on the breadth of market strength.  

Further Reading:  Trading Psychology and My Upcoming February Seminar