Market’s Weekly Bill of Health
The Long Term Picture Downgraded One Notch
With the market’s decline over the past week our longer term survey (200 day moving average evaluation) worsened as it broke the bullish threshold with the long term trend of the market downgraded to neutral-bullish. Our more sensitive MATA survey also slipped two points falling to low neutral-bearish territory and at risk of falling into bearish category (< 40%). If the MATA survey slips into bearish territory we are likely to see the long term trend (200d survey) move from a neutral-bullish rating to a low neutral-bearish rating and being downgraded another notch.
The market’s decline needs to be taken into context as it appears worse than it is and why the long term outlook for the market is not bearish yet. From the April high of 1422.38 on the S&P 500 to the today’s low of 1324.79, the S&P 500 has declined 6.8% which is still considered a pullback as corrections range from 10%-19% declines and bear markets are defined as declines greater than 20%. So with the market’s 6.8% decline we are not even dealing with a correction as of yet. A summary of the market’s long term and intermediate term trend is provided below.
* 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 decreased from the prior week from 61% to 59% while the percentage of stocks in downtrends increased from 39% to 41%. The decline to 59% lowers the long term trend for the S&P 500 one notch from bullish to neutral-bullish. In terms of sectors, the consumer staples sector takes the top spot as it’s long term trend strengthened as it saw the percentage of its members in uptrends increase from 73% to 78% while the health care sector takes the second spot as it held on to its 73% reading. The absolute worst sector is energy with 86% of its members in long term bearish trends. Given energy represents 11.3% of the S&P 500, its weakness is weighing on the S&P 500 and offsetting some of the improvement in health care and consumer staples.
Classifying the four categories for the survey in terms of seasons helps to gauge the market’s maturity. This bull market remains to be dominated by the early bull market (AF, Spring) and late bull market (AR, Summer) categories, indicating the age of this bull market remains young as late bull markets have the AR categories dominating with more stocks also residing in the early bear market (BR, Fall) category.
The biggest shift we have seen in the categories over the last month is that many of the stocks in the S&P 500 that were marginally above their falling 200 day moving averages (200d MA) fell below them with the selloff over the last week to move from the AF (Above Falling) to the BF (Below Falling) category as the AF category nearly dropped in half from 19.0% to 11.2% over the last week and the BF category increased sharply as it rose from 27.0% to 37.4%.
What we are seeing is that rather than a mature bull market top in which we should see a large percentage in the AR and BR categories, instead we are seeing a baby bull market that began at the October 2011 lows in jeopardy of having its life cut short without fully moving into a mature bull market (large AF and AR category and low BF category) given the short duration (October 2011 to April 2012) of its move.
While the bull market’s long term trend has been cut from bullish to neutral-bullish and in jeopardy of being downgraded even further, when looking at sector performance year-to-date, there is still some support for the bulls that the market is simply having a nasty intermediate term pullback rather than having put in a bull market top.
The sectors most leveraged to the economy that outperform when the economy is expanding are leading the market this year. The consumer discretionary, technology, and financial sectors are all up nearly twice the performance of the S&P 500. Conversely, the non-cyclical sectors that do best in a weak to decelerating economy are underperforming the S&P 500 (except for health care). If we are witnessing a market putting in a top we should see the non-cyclical sectors significantly outperform the cyclical sectors leading into a top and not after one which was never the case heading into the April 2012 peak.
Moving Average Trend Analysis (MATA)
We saw a further worsening in the MATA survey for the S&P 500 in which the percentage of stocks in uptrends decreased from 44% to 42%. We saw an increase in the percentage of stocks in intermediate downtrends from 22% to 37% from last week’s reading as many stocks that were trying to rally and who were trendless saw their declines resume as they moved to bearish categories.
At a reading of 42% the intermediate trend for the market is neutral-bearish and on the threshold of turning bearish (< 40%) and a further worsening in the intermediate trend for the market will continue to weigh on the long term trend of the S&P 500.
52-Week Highs and Lows Data
The data for the S&P 500 for 52-week highs and lows shows a confused market. Over the past month 25% of the S&P 500 hit a 52-week high while only 6% hit new 52-week lows. What makes the backdrop in this survey a bit confusing is that one of the more cyclical sectors, consumer discretionary, has the strongest breadth with 41% of its members making a 52-week high over the last month. At the same time, of the 4 sectors with more new 52-week highs than the S&P 500, three are defensive non-cyclicals which gives a bearish tone to the market’s breadth.
That said, most of the sectors within the S&P 500 show new 52-week highs well above new 52-week lows except for the energy sector which remains a technical mess. The technology sector has been weakening considerably over the last few weeks and it has seen its percent of new 52-week lows over the preceding month rise from 3% to 6% in the last week.
Given the above, the message provided in the surveys is an intermediate-term correction that has gone on now for 31 days and has significantly weakened the longer-term trend from bullish to neutral-bullish as the 200d MA survey weakened from 61% to 59%. On the bullish side of the ledger, this intermediate correction is running out of time as most intermediate-term moves end between 20-30 days and we can expect some type of oversold rally to occur to alleviate the market’s oversold condition.
We are still dealing with a market pullback that has not even reached correction status (10%-20% decline) but has been pervasive enough to downgrade the market’s long term trend. We have seen some decent economic reports come in this week that should have lifted the markets but the fact the market’s have closed over the last few days near their lows suggests that European risks continue to weigh on global markets and that lower prices may still be ahead.
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