Markets vaulted to new all-time highs when the Fed announced at its FOMC meeting on the 18th that it would not taper its quantitative easing purchases of US treasuries and mortgage backed securities. The S&P 500 reached a high of 1729.86 on the 19th while the Dow saw a print of 15,709.58 on the 18th. As eyes turn towards the budget battle royale the markets softened as the weekend approached. The markets trend and momentum have improved though the one glaring kink in the market’s chain has been the weakness in the financials, which have lagged as of late and could pose concern for the market unless they turn around.
S&P 500 Member Trend Strength
As shown below, the long-term outlook for the S&P 500 is clearly bullish as 90.0% of the 500 stocks in the index have bullish long-term trends, up from a reading of 84.4% four weeks ago. The market's intermediate-term trend also remains in bullish territory at a reading of 71.6%, up more than 10 points from four weeks ago. The market’s short-term outlook improved significantly from a reading of 22.4% two weeks ago, which put it deep into bearish territory, to the current 82.8%, which upgrades the market's short-term trend to a bullish reading. All three time outlooks are currently bullish with the strongest, the market’s long-term outlook, showing the highest reading.
* 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 90% of stocks in the S&P 500 with rising 200d SMAs and 86.8% of stocks above their 200d SMA. Also, all 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 67%.
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 two weeks ago was the daily MACD buy signal that was registered and suggested the market’s correction was over. Despite the market hitting fresh all-time new highs, the market’s weekly MACD remains on a sell signal.
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 inched up slightly from last weeks 86% reading to this week’s 87% which keeps the market’s short-term momentum firmly in bullish territory.
The intermediate momentum of the market improved modestly to 40% from last week’s 33% reading. The 7-point jump in the percent on weekly MACD buy signals came predominantly from the industrial sector who saw a 15% jump in weekly buy signals.
The market’s long-term momentum remains solid at a strong 79% 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 daily momentum surge back into bullish territory, it is a concern that the market’s weekly momentum remains weak at only a 40% reading even with a new high in the market. We have seen a negative divergence between the market’s price and weekly momentum, which could indicate the move off the November 2012 lows is getting long in the tooth and we may have a consolidation or corrective period ahead.
Source: Bloomberg
The two key sources of weakness in the S&P 500’s weekly momentum are the financial and consumer staple sectors. Financials have only 7% of their members on weekly MACD buy signals while consumer staples have only 20% on weekly MACD buy signals. Given their combined weight of 26% of the S&P 500, these are the two anchors keeping the market’s intermediate-term momentum from liftoff.
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 22% of stocks within the S&P 500 that are within 2% of their 52-week highs while only 7% are experiencing bear markets, a comfortable margin relative to the average found by Lowry Research. Large caps appear the place to be as the S&P 600 (Small Caps) shows the weakest margin between those near new highs (19%) and those in bear markets (14%).
Source: Bloomberg
The current market leaders - health care, industrials, and technology - have the highest percentage of members within their group that are within 2% of a new 52-week high and very few members who are currently experiencing a bear market (20% + decline), if any new 52-week lows. Of note is that the telecommunication, utilities, and energy sectors have more members experiencing bear markets than those within 2% of a new high.
Source: Bloomberg
Market Indicator Summary
Below is a multi-indicator chart of the S&P 500 that measures breadth and momentum. The three key portions I want readers to focus on are the second, third, and bottom panels. These show that the S&P 500 has reached short-term overbought conditions (see red circles) which have marked either short-term tops or pauses in an advance and suggests the market may cool off a little next week to work off the overbought condition.
Source: Bloomberg
Summary
While the S&P 500 has reached a new all-time high, it is currently overbought and due to catch its breath heading into next week. The market’s trend and momentum remain strong with the financial sector showing some concern of weakening, but the overall health of the market remains solid. Looking at 52-week breadth shows no warning signs of a major top forming and suggests the bulls remain in charge.
