Market’s Bill of Health – Improvement in Long Term Trend Approaches Bullish Levels
With the equity market rally over the past month our long term and intermediate surveys improved slightly with the biggest development in the long term outlook (200 day survey) on the verge of moving into bullish territory (>60%).
* 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 increased from the prior week from 54% to 59% while the percentage of stocks in downtrends decreased from 46% to 41%. The increase to 59% moves the market one point shy of returning to bullish territory. In terms of sectors, the utility sector takes the top spot as the percentage of its members in uptrends increased to 90% while the health care sector takes the second spot with its 77% reading. The absolute worst sector remains energy with only 25% 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. Another sector that is weighing heavily on the market is the technology sector which represents more than 20% of the S&P 500. The tech sector has more stocks in bearish trends (56%) than bullish trends (42%) and we will likely need to see that trend reverse for the market to gain any serious traction ahead.
Moving Average Trend Analysis (MATA)
We saw a further improvement in the MATA survey for the S&P 500 in which the percentage of stocks in uptrends increased from 28% to 33%. We saw a decrease in the percentage of stocks in intermediate downtrends from 58% to 53% from last week’s reading as many stocks that were trendless are starting to find their bullish footing.
At a reading of 33% the intermediate trend for the market is still 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 last month was 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 a bullish divergence with the Summation Index, followed by a strong recovery. Whether we repeat the 2010/2011 pattern or not, for a clear sign that the bullish trend is resuming we need to see a strong bullish move in breadth north of the 2800 reading on the Summation Index. This is what has occurred in the bullish advances since 2006 and at a reading 2430 we need to see breadth improve a little more before the all-clear is given.
52-Week Highs and Lows Data
The data for the S&P 500 for 52-week highs and lows shows a market that remains very defensive as the bulk of new 52-week highs are coming from defensive sectors such as utilities, telecommunication services, and health care. Strong markets witness new 52-week highs in cyclical sectors like financials, consumer discretionary, and technology, which make up the bottom of the pack in terms of new 52-week highs (see lower portion of figure below).
Given the above, the message provided in the surveys is a gradually improving intermediate and longer-term picture for the market, with the big development coming from improvement in the 200d MA survey which is on the threshold of moving back into bullish territory (> 60%). Breadth has also improved as seen by the McClellan Summation Index with a greater sense that the worst for now is behind us. Readings in both our 200d and MATA surveys north of 60% and a McClellan Summation Index reading north of 2800 will do much to alleviate our concerns for the markets and signal that the bulls are now back in control.