Market’s Bill of Health

Intermediate Outlook Weakens, May be Downgraded Ahead

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Over the past week the major indexes have broken through their 50 day moving averages with the NASDAQ and the Russell 2000 testing their 200 day moving averages. The recent decline has further eroded the S&P 500’s intermediate trend from 72% of its 500 members in bullish intermediate trends to the present reading of 60.2%. Further weakness below 60% will cause the S&P 500’s intermediate outlook to be downgraded from bullish to neutral-bullish.

S&P 500 Trend Strength

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

200 Day Moving Average Evaluation – Long Term Trend Determination

As shown in the table below, the net percentage of stocks that are in long term uptrends remains essentially unchanged at 66%. In terms of sectors, the financial and utility sectors take the top spots as 81% of each sector’s members are above their 200 day moving averages. The absolute worst sector is technology as only 46% of its members are above their 200 day moving averages.

200dsma

Moving Average Trend Analysis (MATA) – Intermediate Term Trend Determination

The MATA survey for the S&P 500 has weakened in the last week from 66% to 60% and a further decline below 60% would cause the S&P 500’s intermediate outlook to be downgraded from bullish to neutral-bullish. Of the ten sectors in the S&P 500, both the energy sector and the utility sector saw improvements in their intermediate trends as strength in natural gas names is benefiting energy while utilities are strengthening due to their perceived nature of safety in a weak market.

mata

52-Week Highs and Lows Data

The data for the S&P 500 for 52-week highs and lows shows broad-based strength with both cyclical and non-cyclical sectors participating. Over the past month we have seen roughly a third of the 500 stocks within the S&P 500 hit 52-week highs while only 2% have seen new 52-week lows, which is a very healthy spread. Major market peaks are typically seen when you have a balance of new 52-week highs and lows as the mantle of leadership slowly tilts from the bulls to the bears. However, in strong bullish markets you see far more new 52-week highs than lows and that is what we currently see as there are 15 new 52-week highs for every 52-week low over the last month.

52 week
Source: Bloomberg

Sector & Asset Class Rotation

Below is the relative rotation graph from Bloomberg that shows both the relative momentum and relative performance of assets versus a benchmark. Numbers north of 100 show improving relative momentum while numbers below show weakening relative momentum to the benchmark, and numbers to the right of 100 show outperforming assets and to the left underperforming assets.

Market Cap Rotation

Over the last few weeks we have seen small caps (SML) underperform large caps and it looks like midcap stocks (MDL) are also rolling over and beginning to underperform large cap stocks. Megacap stocks' (OEX) underperformance over the last month is also coming to an end as investors seek safety.

Weekly Market Cap Relative Performance to S&P 500 (10/24/2012)

market cap
Source: Bloomberg

Sector Rotation

In addition to an aversion of risk in market cap, investors are also shying away from cyclical sectors as industrials (XLI), energy (XLE), technology (XLK), and materials (XLB) have all underperformed the S&P 500 over the last few weeks while consumer staples (XLP) and utilities (XLU) gain strength.

Weekly Sector Relative Performance to S&P 500 (10/24/2012)

sectors
Source: Bloomberg

Fixed Income Rotation

The message of shying away from risk assets is also present in the fixed income market. Over the last quarter the emerging bond market bonds (EMB) is losing bullish relative momentum to the UST market (TLT), with investment grade corporates (LQD), high yield (HYG), and preferreds (PFF) also beginning to weaken against USTs on a trailing quarterly basis.

Weekly Fixed Income Relative Performance to iShares Barclays 20+ Year T-Bond (10/24/2012)

fixed income
Source: Bloomberg

Summary

The market’s long-term and intermediate-term trend remain in bullish territory for now. However, further weakness will cause the markets intermediate trend to be downgraded to neutral-bearish. The message of risk aversion is present in every area of the market as larger cap stocks are outperforming smaller cap issues and non-cyclical sectors are outperforming cyclical sectors and the fixed income space is witnessing spread products (corporates, preferreds, munis) underperform USTs.

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