How Strong is the Uptrend?

Read on for which sectors will perform best in the short term.

   

Video Transcript

I’ve got a couple of numbers on my chart that I think you’ll find very interesting. One of the things that we look at when we’re trying to determine how strong the trend is we want to know how many market components – in this case, stocks listed on the New York Stock Exchange – every time the S&P 500 hits a new high, how many of them also hit a new 52-week high? That’s what we’re interested in because that tells us a lot about whether or not the rally is stable and has a lot of momentum behind it because we can measure how many market participants took part in that and, therefore, how likely it is to continue.

The pattern that I show you on the chart in the video shows you that less stocks have participated over time, decreasing from 452 stocks on the NYSE also hitting new highs in December to just 172 stocks as of April 10 hitting a new 52-week high at the same time the S&P 500 was hitting a new 52-week high. That’s relatively weak, so we get a little nervous about that.

In fact, one way to think about this is that Elliot Wave theorists – technical analysts that try to understand how the trend is moving and where it’s most likely to pull back – generally look at every small trend as a series of, basically, five moves. I show you the individual moves on the chart in the video.

Currently, we’re in Wave 5, and if my analysis is right, Wave 5 will run out of steam in the short term and we’ll get a little bit of correction, which happens in basically three waves to the downside, as I show you in the video. Then, we see a correct generally in favor of the primary trend, which right now is still bullish since 2009.

In fact, on the chart in the video, I show you how that played out in the last correction to the downside in October/November 2012.

So, basically, what we’re saying is that if I had a trend in front of me that was divided into waves, and someone were to ask me, “Which portion of the trend would you expect the fewest number of stocks to also participate in those new 52-week highs?” I would say, “It would be Wave 5. That’s when things get weak. That’s when a lot of divergences occur. That’s when your defensive sectors like consumer staples and utility stocks tend to outperform everything else.”

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