Market’s Weekly Bill of Health

Relief Rally in Progress but 2010/2011 Script Suggests New Lows Ahead

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With the market’s decline over the past week our longer term survey (200 day moving average evaluation) worsened with the long term trend of the market close to being downgraded another notch from neutral-bearish to bearish. Our more sensitive MATA survey fell meaningful from the prior week which pushed it deeper into bearish territory. Unless the market stabilizes soon we are likely to see the long term trend (200d survey) downgraded another level to bearish.

trend summary

* 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 long term uptrends decreased the prior week from 52% to 50.1% while the percentage of stocks in downtrends increased from 48% to 49%. The decline to 50.1% puts the market’s long term trend in jeopardy of being downgraded another level if it falls below 50%. In terms of sectors, the utility sector takes the top spot as the percentage of its members in uptrends increased to 78% while the health care sector takes the second spot with its 62% reading. The absolute worst sector remains energy with only 9% of its members in long term bullish 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 utility and health care sectors.

200 day moving average

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 month to move from the AF (Above Falling) to the BF (Below Falling) category as the AF category nearly dropped in half from 18% to 1.4% over the last month. The early downtrend category (BR) saw the biggest increase over the prior month as many stocks have topped out with the market’s recent weakness and are moving into their private bear markets.

season

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 31% to 20%. We saw an increase in the percentage of stocks in intermediate downtrends from 47% to 61% 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.

mata

At a reading of 20% the intermediate trend for the market is now deep into negative territory and at a level where we often see intermediate bottoms. This is also shown when looking at the McClellan Summation Index which is at levels associated with intermediate lows. If we are to repeat the 2010 and 2011 cycles we should see a relief rally followed by a renewed decline to new lows on less negative breadth to setup bullish divergence with the Summation Index, followed by a strong recovery.

summation
Source: Bloomberg

52-Week Highs and Lows Data

The data for the S&P 500 for 52-week highs and lows shows a market where the bulls and the bears show no clear winner as there has been roughly an equal amount of the market making new 52-week lows and highs. Over the past month 8% of the S&P 500 hit a 52-week high while 10% hit new 52-week lows.

52 week highs lows
Source: Bloomberg

Summary

Given the above, the message provided in the surveys is an intermediate-term correction that has significantly weakened the longer-term trend which is at risk of being downgraded from neutral-bearish to bearish as the 200d MA survey weakened from 52% to 50.1%. 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, which is also the message from the McClellan Summation Index. If we are to repeat the 2010 and 2011 script we should see a relief rally that fails followed by new price lows in the market which occur with fewer and fewer stocks participating on the downside to setup a bullish divergence with breadth followed by a sustained move higher.

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