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Sunday, May 11, 2008

Moving averages and DMI for stocks in the S&P 500 - what can we learn?

Here are some interesting tables of data I just derived from running the Alert HQ process. We scan about 7200 stocks and ETFs each weekend looking at various technical analysis characteristics. The following tables show some numbers for the stocks in the S&P 500.

Moving Average Analysis --

Here we present the number of stocks in the index whose 20-day moving average is above their 50-day moving average. The data is presented by industry sector.

20-day MA above 50-day MA Industry Sector
55 Consumer Discretionary
25 Consumer Staples
33 Energy
57 Financials
25 Health Care
44 Industrials
49 Information Technology
17 Materials
6 Telecommunications Services
23 Utilities

When the 20-day moving average of a stock is above its 50-day moving average, it is generally considered to be a bullish sign of strength in the chart.

From the table we see that after the recent down week in the markets there are still 334 stocks out of 500 with a 20-day MA above a 50-day MA. That is roughly equal to two thirds of the stocks in the index.

The good news is that it indicates the stocks comprising the index are in a strong position.

The bad news is that this seems to indicate a continued overbought situation.

The unexpected news is related to the industry sectors.

The numbers are highest for Financials and Consumer Discretionary. These are the two sectors that most analysts, pointing to the ongoing credit crunch, housing problems, a weary consumer, etc., consider to be the weakest from a fundamental viewpoint. It proves, however, that the stocks that were most beaten down a couple of months ago have made quite a comeback. Well over half of the stocks in each of these sectors are doing well. Can they hold onto their gains?

Many analysts have also been surprised that the Health Care sector has not performed better given that it is often a refuge when markets are in trouble. We see here that Health Care isn't doing all that badly with approximately half the stocks in the sector reflected in the number above.

Large cap tech was expected to do well and we see that the Information Technology sector is indeed delivering sizzling strength with 49 of 71 stocks still bullish.

There are no surprises in the Energy sector. With oil prices going through the roof, it would be natural to expect this sector to be leading the market and we see 33 of 36 stocks with their 20-day MA above the 50-day MA.

DMI Analysis --

The chart below presents the result of applying Wilder's DMI analysis to the stocks in the S&P 500. This chart paints a distinctly different picture.

DMI - UP Trend Industry Sector
22 Consumer Discretionary
10 Consumer Staples
16 Energy
19 Financials
9 Health Care
23 Industrials
31 Information Technology
8 Materials
6 Telecommunications Services
12 Utilities

DMI, or Directional Movement Indicator analysis, attempts to determine the direction of a trend and how strong that trend may be. The TradeRadar software interprets a decent value of ADX, over 20, to be sufficient to make it on this list.

We have a total of 156 stocks registering an UP trend. This is less than one third of the stocks in the index.

Looking at DMI, suddenly the Financials don't look nearly so strong. Same with Consumer Discrectionary.

Energy stocks are still doing well but it is clear there has been a weakening in trend.

Conclusion --

What are these market statistics telling us? Don't be surprised if we see a rotation out of over-bought and weakening Financials and Consumer Discretionary and into other sectors. The recent market rally has crested and general weakness in stocks was detected again this week. This was especially evident in Financial stocks.

The combination of DMI and moving average analysis indicates that many stocks have reached a peak and their short-term trend is no longer up. The 20-day MA may still be above the 50-day MA but the direction of the 20-day MA is now probably down. The question is whether the support of the 50-day MA will hold for many of these stocks whose DMI already says the trend has become neutral or down.

If we are actually in a new trading range as I discussed in a post last week, it might make sense to see some of the former leaders decline, making room for a new set of market leaders on the next upswing. It would also be expected to see DMI registering less stocks in a clear UP trend.

And if the major indexes indeed test their lows again, we might see numbers for Utilities and Consumer Staples rise even further.

NOTE: this post is a correction and expansion of yesterday's post which had some incorrect numbers.

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