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TW Patron++
Posts: 1,054
Reply with quote  #1 

Those who monitor market internals are fully aware of the narrowing liquidity showing up in most of the major indices over the past year.  Waning liquidity as measured by breadth indicators are showing up everywhere, particularly in the small caps and tech stocks.


One sign the bull run is getting long in the tooth is evidence of money flowing out of the smaller caps and into the large caps. One of the better measuring sticks of market liquidity is the cumulative AD lines, and almost all index AD lines have not been confirming new recovery price highs.  We are all aware of the recent breadth problems in the Nasdaq composite, NDX, NYSE composite, and NYSE common stocks.


However, there is evidence of healthy and broad-based liquidity infusions into the broad based larger cap stocks, suggesting following the current correction/consolidation phase, we will likely see higher prices ahead for the large caps at the least.


The Russell 1000 index, aka RUI, has been exhibiting good relative strength of late as measured by its internals. The RUI cumulative AD line has been struggling at its August 2005 resistance, but has managed to nominally break to new recovery highs, rare behavior of late in the breadth indicator universe.



Money is flowing into the broad-based RUI constituency as well as measured by its cumulative $ weighted up-down volume ($UD) line (blue curve in below chart).  The RUI $UD MCO, not shown, is struggling to remain above the zero line, thus near term trouble is likely, but by liquidity measurements, there are likely higher highs down the road.



The unweighted RUI index accentuates the broad based strength in this group of stocks over the past several months.  Note since the April 2005 bottom, the liquidity attraction into the aggregate of the larger stocks has been robust.



Compare the RUI unweighted index's strength with the RUT unweighted price index (blue curve below).  While the traditional RUT price nominally broke its August 2005 high, the unweighted RUT version has yet to. 



The RUT cumulative AD line has been behaving similar to the Nasdaq AD line for the past year, glaring evidence of shrinking participation in the small cap arena.



However, for those small caps that have been participating in the upward price bias over the past year, are attracting enough positive money flows to overcome the effect of the laggards, as measured buy the RUT cumulative $UD line.  Although currently struggling to exceed its early December high, this indicator has yet to negatively diverge with price. The RUT $UD MCO (not shown) is negatively diverging right now, so one could expect weakness in price in the near future. 



Back to the large caps, the SPX cumulative AD line has also achieved a nominal recovery high, suggesting any price weakness in the near term will be followed by higher prices going forward. Like its broader-based large cap cousin RUI, the SPX AD line is struggling with resistance as well.



Typically, broader based index cumulative AD lines top out prior to their associated prices, as has been studied and discussed on the TW board.  The SPX is no exception to that rule as illustrated by a bird's eye view of the SPX cumulative AD line. As did many AD line variants, the SPX AD line topped out in the first half of 1998, many months before its ultimate price top. Based upon AD line precedents, we likely have not seen the final SPX price high of the current bull market.



Healthy positive money flow into the SPX components continues as measured by the SPX cumulative $UD line.  Like many MCOs, the SPX $UD MCO (not shown) is also negatively diverging currently suggesting the acceleration of positive money flows into SPX components is slowing for the time being.



Another strong sector is the foreign common stocks traded on the NYSE.  The black curve in the below chart is the unweighted average of the 355 foreign stock members of the NYA index, which is comprised of about 2060 common stocks.  Compare the strength of the foreign common stock unweighted index to the total common stocks (US and foreign) unweighted index (red curve). Over the past year, the foreign stocks have served a pretty good leading indicator of the NYA average, and is currently suggesting there will be additional strength in the NYSE common stocks going forward.


The foreign common stock component cumulative AD line has been stronger than the composite NYSE and total common stock AD lines (see Fib's weekly breadth posts).  Currently, the foreign common stock AD line is 16 net positive ticks below its August high suggesting selected ADRs traded on the NYSE may be viable long candidates.


The below chart, and remaining charts in this thread are outputs of a collaborative effort with McClellan Financial Publications. For those not familiar with the McClellan's unique and insightful work, check out this link for further info:,2&url=/reports/market/%3f




Compare the liquidity, as measured by cumulative AD lines, of the foreign common stocks traded on the NYSE with the US-based common stocks traded on the NYSE.  The US-only common stock AD line still has work to do in challenging its August 2005 high.  However, the AD line variant is forming a potentially bullish reverse head and shoulders pattern.



There are signs of strong money flows into all of the NYSE common stocks, as measured by the NYSE commons' cumulative $UD line. The common stock $UD MCO (not shown) is negatively diverging with the unweighted average's new price highs, warning the acceleration of net positive money flows into the NYSE common issues is getting tired for the moment.



Although liquidity in the small caps (RUT), mid caps (MID), and tech stocks (NDX and COMPQ) has been weakening over the past several months, there are still signs suggesting this bull run from 2003 is not likely finished.  From this point on, due diligence will be required for long candidates due to shrinking participation. A look at the areas where liquidity is still strong can assist in narrowing down the sectors for mining out candidates.






TW Member
Posts: 356
Reply with quote  #2 

Thanks, Randy. Looking at the way ER2 (Futures for RUT) is trading with no price progress and strength weakening relative to the big cap groups, you  may be quite accurate in your analysis. For the past 3 seesions, ER2 is spinning around a fulcrum not going anywhere fast. Looks and smells like distribution without damaging price too much. I am sure that the cabal will ramp some issues up so that RUT can tag 700 for the jolly season. Otherwise RUT looks like it is done with this bull thing.



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