As highlighted in last week’s “Market Bill of Health,” various indicators suggested we get a consolidation or correction ahead, and with the S&P 500 down 0.15% (essentially flat) a consolidation is what we got. The market’s health continues to remain bullish and its long-term trend and momentum remain in bull market territory (60%+ readings), and the fact that cyclical sectors are leading is bullish. That said, the ongoing theatre in Washington DC could pose a risk to the market if a deal to raise the debt ceiling can’t be hammered out. The markets revolted in 2011 over the same issue but at least this time around we have the Bernanke Put (AKA: Fed money printing) which was not the case in 2011. Should things in Washington unravel it is likely we may be in store for a larger correction than has been seen so far this year. While there are a lot of bullish underpinnings to the market, I am concerned about the waning momentum in the weekly numbers for the S&P 500. A market with weak momentum could be susceptible to a market decline on any bad news.
S&P 500 Member Trend Strength
As shown below, the long-term outlook for the S&P 500 is clearly bullish as 85.0% of the 500 stocks in the index have bullish long-term trends, down from last week’s reading of 87.2%. The market's intermediate-term has also weakened, slipping from 55.4% last week to 50.4%, putting it on the verge of a downgrade to neautral-bearish. The market’s short-term outlook softened slightly from last week’s 79% reading to this week’s 77.2% level. Two weeks ago, all three time outlooks were in bullish territory, but the weakness in the intermediate outlook caused it to slip into neutral-bullish territory last week and another downgrade may occur next week as well. What is most important is the market’s strong long-term outlook, which is still deep into bullish territory and does not suggest a market top is forming.
* Note: Numbers reflect the percentage of members with rising moving averages: 200-day moving average (or 200d MA) is used for long-term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short-term outlook.
The most important section of the table below is the 200d SMA column, which sheds light on the market’s long-term health. As seen in the far right columns, you have 85% of stocks in the S&P 500 with rising 200d SMAs and 78.0% of stocks above their 200d SMA. Also, nine out of ten sectors are in long-term bullish territory with more than 60% of their members having rising 200d SMAs, with the weakest sector being telecommunications at 50%.
Source: Bloomberg
S&P 500 Market Momentum
The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 500’s momentum on a daily, weekly, and monthly basis. The big change recently is that the S&P 500 saw a daily MACD sell signal last week, the first signal since July 30th which preceded the August correction.
Source: Bloomberg
Digging into the details for the 500 stocks within the S&P 500 we can see that the daily momentum for the market ticked down sharply from last week’s 51% reading to this week’s 32%, which pushed the market’s short-term momentum from neutral-bullish territory to bearish.
The intermediate momentum of the market remained flat at a 42% reading, with the market’s intermediate momentum on the verge of slipping into bearish territory.
The market’s long-term momentum remains solid at a strong 77% this week, though it has softened a little from the 86% reading seen on July 12th.
Source: Bloomberg
While it is encouraging to see the market’s long-term momentum remains in bullish territory, it is a concern that the market’s weekly momentum remains weak at only a 42% reading and a declining monthly reading is not encouraging. The negative divergence we are seeing with the market and its monthly and weekly numbers could indicate a furtther consolidation or correction ahead as the market’s bullish strength begins to fade. The market has had a strong 29% rally off the November lows and nothing goes straight up forever, indicating the market may need to catch its breath before assuming another leg higher. There is also the possibility that the loss in the market’s momentum is warning of a deeper correction than the two we saw this summer.
Source: Bloomberg
52-Week Highs and Lows Data
The insightful Lowry Research Corporation conducted a study on market tops recently (click for link) in which they looked at all major market tops since the Great Depression and found selectivity is a hallmark of all market tops, in which participation in the bull market fades as individual stocks enter their own private bear markets well before the market peaks. They found that, on average, 17.26% of stocks were at or within 2% of their 52-week highs on the day the market peaked while 22.26% were off by 20% or more from their highs, indicating more stocks were experiencing bear markets than were participating in rallying to new highs. For this reason, a look at 52-week breadth of the markets is helpful in detecting an approaching bull market top.
The market continues to display impressive internals that do not suggest a market in danger of rolling over into a bear market. For example, there are 17% of stocks within the S&P 1500 that are within 2% of their 52-week highs while only 11% are experiencing bear markets, a comfortable margin relative to the average found by Lowry Research. The S&P 600 (Small Caps) shows the weakest margin between those near new highs (16%) and those in bear markets (15%).
Source: Bloomberg
The current market leaders are consumer discretionary, health care, energy, and technology, as these sectors have the highest percentage of members within their group that are within 2% of a new 52-week high and very few members that are currently experiencing a bear market (20% + decline), if any new 52-week lows. This is bullish as two of the top three sectors are cyclical stocks that tend to peak ahead of the market, and the fact that these are the strongest sectors is encouraging. Of note is that the telecommunication, utilities, and consumer staples sectors have the fewest percentage of members near 52-week highs. This is significant as these defensive sectors tend to act as market leaders near major market peaks.
Source: Bloomberg
Market Indicator Summary
Below is a multi-indicator chart of the S&P 500 that measures breadth and momentum. Last week I had readers focus on the second and third panels. These showed that the S&P 500 had reached neutral short-term conditions after being overbought in the prior week. Currently these two indicators have reached oversold conditions (see green circles), which have marked short-term bottoms in the past. So far, the S&P 500 is defending its 50-day moving average and with short-term conditions at hand we may see a rally entering next week.
Source: Bloomberg
Summary
While the S&P 500’s long-term trend and momentum are clearly in bullish territory, negative divergence in the markets weekly and long-term MACD suggests a consolidation period lies before us, though our multi-indicator chart of the S&P 500 also suggests we may see a short-term rally first. The market can change on a dime given the potential for a technical default on our debt ceiling, and I would expect continued volatility ahead until we can put the issue behind us.
