Market’s Weekly Bill of Health

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With the market’s consolidation over the past week our longer term survey (200 day moving average evaluation) improved slightly while our more sensitive survey shows more subsurface deterioration. Taken together, in conjunction with our analysis below, we believe we are still experiencing an intermediate term correction within the context of a bull market that began off the October 2011 lows.

* Note: For further explanation of the market surveys and background on analysis, please click here.

200 Day Moving Average Evaluation

As shown in the table below, the net percentage of stocks that are in uptrends increased from the prior week from 74% to 77% while the percentage of stocks in downtrends decreased from 26% to 23%. Note: for the past week the improvement in the S&P 500 came primarily from cyclical sectors in which financials, consumer discretionary, technology, industrials, and materials all showed gains while the largest decline came from one of the more defensive sectors, consumer staples. This suggests that the markets primary trend remains up and we are experiencing a much needed pullback to work off overly bullish sentiment and overbought conditions.

200 day moving average evaluation

Classifying the four categories for the survey in terms of seasons helps to gauge the market’s maturity. We saw a further maturing of the market in the last week where 2% of the market moved from late bear market (winter, BF) to early bull market status (spring, AF) over the prior week’s reading. Given the percentage of stocks in the early topping out phase (Fall, BR) that occurs before stocks move into their own private bear markets remains the smallest group with only 3%, there is simply no evidence that the stock market is putting in a top and why we believe the current market weakness is merely an intermediate-term correction.

season market is in

Moving Average Trend Analysis (MATA)

We saw a slight worsening in the MATA survey for the S&P 500 in which the percentage of stocks in uptrends decreased from 63% to 58% with a corresponding increase for stocks in downtrends from 15% to 19% from last week’s reading. The percentage of stocks that are trendless increased from 22% to 23%. The financial sector continues to hold the top spot from last week though it is weakening, falling from 84% to 77% from the prior week, while defensive sectors like consumer staples continue to improve. This deterioration supports the conclusion of an intermediate-term correction. We will need to see breadth in cyclical sectors improve before we can conclude that the intermediate correction is over.

moving average trend analysis

52-Week Highs and Lows Data

The data for the S&P 500 for 52-week highs and lows continues to suggest a healthy bull market. Over the past month 26% of the S&P 500 (132 stocks) hit a 52-week high while only 3% (15 stocks) hit new 52-week lows indicating, once again, that the market is not in the process of putting in a major top. During such market tops you typically see nearly an equal percentage of stocks making new 52-week lows and highs as the market begins to deteriorate, which is clearly not seen in the data below.

Another point of interest is that two of the top three sectors in terms of participants making new 52-week highs are cyclicals, with consumer discretionary at 44% and technology at 34% (see chart). These sectors often peak ahead of the market given their cyclical nature and the fact that these are some of the strongest sectors suggests the market remains constructive.

52 week high lows 20120418
Source: Bloomberg

Another point to make is that two sectors that benefit from a strong USD and tame inflation are the consumer discretionary and consumer staples sectors. High inflationary pressures cut into discretionary spending and lead to higher input costs for consumer staples. The fact that both sectors show strong market breadth makes sense as import inflation remains tame due to consolidation in the dollar from the beginning of this year. That may end, however, as the dollar appears to be forming a triangle pattern typically associated with strong breakouts. A breakout in the USD would likely lead to further strength in the consumer discretionary and consumer staples sectors as import inflation and overall commodity inflation would weaken, while a breakdown in the USD would likely be supportive for commodity-focused sectors like the energy and basic materials sectors and the export-focused industrial sector.

usd index
Source: Bloomberg

Summary

Given the above, the clear message given is a healthy market with broad-based participation not showing any indication of rolling over into a bear market. Rather, we believe current market action reflects an intermediate term correction within the context of a bull market that began off the October 2011 lows. One interesting dynamic that is likely to lead to sector rotation in the near future will be the breakdown or breakout of the USD from its consolidation this year. A breakout should benefit negative inflation-sensitive groups like consumer staples and consumer discretionary while a breakdown in the USD should benefit commodity producers and exporters.

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About Chris Puplava

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