Is the Rally's Momentum Fading Away?

By Kapitall | February 20, 2012 AAA


Written by Rebecca Lipman

The S&P 500 is seeing a low number of new highs, signaling that the momentum of the start-of-the-year rally may be fading.

Investors have been worried about this rally from the very beginning, wondering if it was the real deal. You may have even heard people call it the "Nothing But Apple" rally, referring to Apple's gigantic role in spurring the economic data forward.

MarketWatch reports, in the first week ending February 3rd 16.4% of the NYSE hit a new 52-week high, the highest percentage in six months. But the numbers are dropping; last week 11.7% were hitting a new high.

Should We Be worried? Not yet
"Consider what Ned Davis Research found upon trying to correlate the weekly new-high data with bull market peaks. They found that there typically is a long lag time between when the percentage of stocks hitting new weekly highs reaches its peak and when the bull market finally tops out."

"In fact, the firm found that in no case over the last five decades did a bull market top out before a peak was reached in the percentage of weekly new highs. And, furthermore, the average lag time between a peak in that percentage and the bull market's top was more than 33 weeks nearly eight months." (Via MarketWatch)

Furthermore, the number of companies no longer reaching new highs does not correlate with an increasing number of companies reaching new lows. This is good news.

Marvin Appel of the Systems & Forecasts advisory service thinks we are still in the clear. He calculates "a 10-day moving average of a daily ratio of new 52-week highs on the NYSE to the total number reaching new highs or lows. This moving average currently stands at more than 97%, which Appel rates as solidly in bullish territory." Anything below 80% would signal a bearish turn.

Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below.



Business Section: Investing Ideas
We wanted to take a look at stocks bucking the trend. We looked at the 190 stocks with market caps above $300 million that are reaching a new 52-week high.

Then we screened for companies with the bullish sentiment of institutional buyers and short sellers: These names have a net increase in institutional purchases in the current quarter and short covering month-over-month.

Do you think these stocks will continue to rally higher? (Click here to access free, interactive tools to analyze these ideas.)

1. Colfax Corporation (NYSE:CFX): Designs, manufactures, and distributes fluid handling products that transfer or control liquids in various applications worldwide. Net institutional purchases in the current quarter at 7 million shares, which represents about 23.58% of the company's float of 29.69 million shares. Shares shorted have decreased from 8.52 million to 5.48 million over the last month, a decrease which represents about 10.24% of the company's float of 29.69 million shares.

2. EastGroup Properties Inc. (NYSE:EGP): Focuses on the development, acquisition, and operation of industrial properties in the United States. Net institutional purchases in the current quarter at 1.7 million shares, which represents about 6.6% of the company's float of 25.76 million shares. Shares shorted have decreased from 1.81 million to 1.45 million over the last month, a decrease which represents about 1.4% of the company's float of 25.76 million shares.

3. GeoResources, Inc. (Nasdaq:GEOI): Engages in the acquisition, re-engineering, development, and exploration of oil and gas reserves in the Southwest, Gulf Coast, and the Williston Basin areas of the United States. Net institutional purchases in the current quarter at 689.8 thousand shares, which represents about 3.48% of the company's float of 19.83 million shares. Shares shorted have decreased from 2.40 million to 2.20 million over the last month, a decrease which represents about 1.01% of the company's float of 19.83 million shares.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Read more: /stock-analysis/2012/Indias-Obsession-With-Gold-AUY-NG-GTU-AZK0214.aspx#ixzz1mfrIlp8L

Author does not own shares in the companies mentioned above. Institutional data sourced from Fidelity. Short data sourced from Yahoo! Finance.

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