Market’s Bill of Health – Short Term Top Avoided as Bearish Divergences Resolved
Last week I highlighted a number of short-term bearish divergences that suggested we may approach a small top in the markets. On the flip side, I also showed that there were two bullish chart patterns at work in the S&P 500 that could play to higher highs. With the strong performance of the market since last week, the bullish chart patterns have indeed played out causing the bearish divergences to now be resolved. With that said, while the market's trend and momentum remain strong and firmly in bullish territory, the market is overbought and we will likely get a short term pullback before heading higher.
S&P 500 Trend Strength
* Note: Numbers reflect the percentage of stocks with rising moving averages: 200d MA is used for long term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short term outlook.
S&P 500 Member Trend Strength
Breaking out the 500 stocks within the S&P 500 into their respective sectors shows an underlying message of accelerating global growth. Like last week, two of the top sectors showing the most bullish trends are the industrials and material sectors, both levered to a growing global economy. The other standout is the financial sector which is likely benefitting from a steeper yield curve as that helps boost their interest margin. Overall, we see that the bulk of the stock market is in bullish trends and the most cyclical sectors are leading while the defensive sectors (consumer staples, utilities, and telecommunications) are lagging which gives the market a bullish tone.
The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 500’s momentum on a daily, weekly, and monthly basis. Compared to last week, the percent of stocks within the S&P 500 with daily MACD BUY signals improved 67% to 74% with the intermediate momentum of the market also improving from 72% last week to 77% this week. Also seeing an improvement is the market’s long term momentum as the percent of S&P 500 stocks with monthly MACD BUY signals increased from 62% to 68%. The evidence below highlights that the market's momentum across multiple time frames remains bullish with the path of least resistance remaining to the upside.
52-Week Highs and Lows Data
We have a well-represented market rally as more than one fourth of the entire S&P 500 hit a 1-year high in the last five days. What is also encouraging is that, like the trend summary above, the two leading sectors are geared towards global growth (materials, industrials) which appears to be accelerating as materials and industrials tend to underperform when global growth slows. Additionally, the financial sector is highly cyclical and the fact that the financial sector is one of the top sectors suggests that both global and domestic growth remains solid. As seen below, we have a very robust market rally on our hands and there is very little red below, with the only area of weakness in the utility sector.
We were seeing a bit of a negative divergence between the market hitting new highs with fewer and fewer stocks participating in the rally. This type of divergence highlighted below occurred prior to the 2012 spring and fall corrections. The bearish divergence is being resolved bullishly as the number of new highs surges with the market (see image below).
The market continues to march higher in 2013 as the short-term to long-term trends and momentum for the S&P 500 remain bullish. The slight deterioration in the daily readings for MACD BUY signals as well as 52-week high data that previously warned of a potential short term top appear to be resolving on continued strength. The data highlighted above suggests a very healthy market that is seeing broad-based participation and strong momentum. Given the health of the market, any corrections that occur are likely to be mild and orderly.