Fewer Stocks Beating S&P 500 Threatens Rally: Technical Analysis

The proportion of U.S. stocks performing better than the Standard & Poor’s 500 Index fell to the second-lowest level in 10 years, a sign its 28-month rally may be faltering, according to MF Global Holdings Ltd.

Only 34.8 percent of stocks in the benchmark gauge beat its performance in the past 20 days as of the end of last week, according to Craig Peskin and John Kolovos, MF Global’s co-heads of technical analysis. They said that’s the second-lowest proportion in 10 years.

“The index has been supported by a select few,” Peskin and Kolovos wrote in a note to clients yesterday. “The advance is narrowing,” they said. “A selective market draws into the question the sustainability of the prevailing move.”

The S&P 500 surged 102 percent from a 12-month low in March 2009 through the end of April of this year after the Federal Reserve introduced measures to stimulate the economy and corporate earnings exceeded analysts’ estimates. The index has since slipped 1.9 percent amid concern the European sovereign-debt crisis would spread and the U.S. may default should lawmakers fail to reach an agreement on raising the nation’s debt ceiling by Aug. 2.

While the advance has shown signs of stalling temporarily, Peskin and Kolovos said they remain bullish on the market because the S&P 500’s trend remains “positive” and 69 percent of the stocks have average prices over the past 50 days exceeding their mean from the last 200 days.

The last time the percentage of outperforming stocks produced a lower reading -- 34.2 percent on Oct. 27, 2008 -- the S&P 500 was at a five-year low, according to data from MF Global and Bloomberg. The benchmark gauge initially rebounded 18 percent in the following six trading days before slumping 33 percent to its bear-market low in 2009.

“The advance needs to broaden out sooner rather than later to avoid negative implications,” Peskin wrote in an e-mail.

Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.