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Market’s Weekly Bill of Health

Wed, Nov 14, 2018 - 3:27pm

When considering the market’s overall health, two topics central to the discussion are trends and momentum. Changes in the market’s vitality and direction are felt in both areas, providing early warning and guidance to investors who are aware of these two factors. When we focus on trends and momentum, we can clearly see a connection to future returns or losses in the stock market.

Market Trend Review

As shown below, the long-term outlook for the S&P 1500 (small, mid and large cap stocks comprising 90 percent of the total equity U.S. market) is neutral-bearish with only 47 percent, or 705 of the 1500 stocks in the index, boasting bullish long-term trends. This is measured by a rising 200-day moving average.

The market’s intermediate outlook is in bearish territory as 28 percent of the market has a rising 50-day moving average.

The market’s short-term outlook is in the neutral-bullish area with 54 percent of the index members showing rising 20-day moving averages. (Note: numbers below reflect the percentage of members with rising moving averages: 200-day moving average (or 200-day MA) is used for long-term outlook, 50-day MA is used for intermediate outlook and 20-day MA is used for short-term outlook. Numbers as of 11/12/18.)

Source: Bloomberg. All indexes are unmanaged and cannot be invested into directly. Forecasts set forth may not develop as predicted.

Long-Term Outlook

The 200-day SMA (simple moving average) column demonstrates the market’s long-term health (shown below). As seen in the far-right columns, roughly 47 percent of stocks in the S&P 1500 have rising 200-day SMAs and just 40 percent of members are above their 200-day SMA. Only three out of the 10 sectors have at least 50 percent of members with long-term bullish trends. This data highlights how poor the market’s long-term trend is looking at the moment.

For the past few weeks, the fragility in the S&P 1500 came primarily from cyclical sectors where financials, consumer discretionary, technology and industrials showed losses while the largest gains in uptrends came from the more defensive sectors such as utilities and healthcare. 

Source: Bloomberg

Intermediate Outlook

The 50-day SMA column gives an indication of intermediate health. As seen in the columns below, about 27 percent of stocks in the S&P 1500 have rising 50-day SMAs. Nearly 35 percent of its members are above their 50-day SMA. Only four of 10 sectors have more than half their members with intermediate bullish trends, highlighting a somewhat poor intermediary market.

Again, the cyclical sectors all showed losses including financials, consumer discretionary, technology and industrials while the largest gains in uptrends came from the more defensive sectors such as utilities and healthcare.

Source: Bloomberg

Short-Term Outlook

The 20-day SMA column displays short-term health. As seen in the columns below, about 57 percent of stocks in the S&P 1500 have rising 20-day SMAs and about 56 percent of its members are above their 20-day SMA. Eight of ten sectors have more than half their members with short-term bullish trends, showing a stronger short-term market.

Energy is the biggest short-term concern, while the largest gains in uptrends came again from the more defensive sectors such as utilities.

Source: Bloomberg

S&P 1500 Market Momentum

The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 1500’s momentum on a daily, weekly and monthly basis. Overall, the market is facing weaker momentum on a weekly and monthly basis but is on a short-term (daily) buy signal. This is consistent with a relief rally.  As seen in the table below, the momentum for the S&P 1500 is bearish in the forward-looking outlook with two out of the three signals calling to sell.

Source: Bloomberg

Digging into the details for the stocks within the S&P 1500, we can see daily momentum is clearly bullish for the market with an impressive 88 percent of members on daily buy signals. On a weekly basis, momentum is in bearish territory at 26 percent; and on a monthly basis the market is neutral-bearish at 46 percent.

With only 46 percent of stocks within the S&P 1500 on daily buy signals, this clearly implies there is reason for concern. Once we see the market above 50 percent in long-term momentum, we will hopefully get an all clear signal.

Source: Bloomberg

What has me weary are the underlining details, and what makes me lean more towards a bigger correction is the weakness in the weekly and monthly numbers. As we can see in the table below, the financial sector is pulling the numbers down. The weighted average of financials alone at 14 percent is a problem. In technology we see the same details.

What is perhaps the most concerning is the weakness in the financial sectors’ weekly numbers, standing at a low 17 percent reading. While the financial sector has clearly weakened over the intermediate and long term, it still has very strong daily numbers (89 percent).

Source: Bloomberg

Bottom line: We often look for signals when reviewing the market’s overall health. In the past week, the signals we see point toward a healthy cyclical short-term market but show indication of rolling over into a secular bear market.  At this point, proceed with caution. The sun is shining now, but cloudy skies might be on the horizon.

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