With the market’s decline over the past week our longer term survey (200 day moving average evaluation) worsened significantly while our more sensitive survey (MATA) also showed more subsurface deterioration. The weakness in our more sensitive MATA survey has finally put a significant dent in our 200d moving average survey and the market needs to stabilize here or the longer term picture for the market will turn down from bullish to neutral.
* 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 uptrends decreased from the prior week from 79% to 61% while the percentage of stocks in downtrends increased from 21% to 39%. Uptrend readings greater than 60% are associated with a bullish outlook for the market while readings between 40%-60% are neutral and readings below 40% are bearish. With the markets current 61% reading the market’s long term trend is marginally bullish and will turn neutral unless breadth begins to improve. In terms of sectors, the consumer staples and health care sectors take the top spots with 73% of their members in uptrends while energy and telecommunication services bringing up the rear with 27% and 38% in uptrends respectively.
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 week 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 week to move from the AF (Above Falling) to the BF (Below Falling) as the AF category fell from 23.4% to 19.0% over the last week and the BF category increased from 20.6% to 27.0%. Of the 500 stocks within the S&P 500, 10.6% of them are within 4% their 200d MA from the underside and so a small rally in the market could easily swing the percentage of stocks in the S&P 500 in uptrends from 61% to back to over 70% with a 4% rally in the markets.
What tends to support the notion that we are simply going through an intermediate correction rather than putting in a major bull market top is that the sectors most leveraged to the economy that outperform when the economy is expanding are leading the market this year. The technology, financial, and the consumer discretionary sectors are all up double-digits and are outperforming the S&P 500 by a sizable margin. Conversely, the non-cyclical sectors that do best in a weak to decelerating economy are performing the worst this year. If we are witnessing a market putting in a top we should see the non-cyclical sectors significantly outperform the cyclical sectors and this is simply not the case.
Source: Bloomberg
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 49% to 44%. Interesting, we saw a decrease in the percentage of stocks in intermediate downtrends from 25% to 22% from last week’s reading. The percentage of stocks that are trendless increased from 26% to 34% as many stocks are beginning to stabilize. The fact that we are seeing fewer stocks in downtrends and more that are trendless indicates we may be putting in an intermediate bottom.
Over the past two days the market has sold off in the early hours just to recover through the remainder of the day which tends to indicate these lower prices are attracting buyers that are supporting the market. We will have to keep an eye on the markets but it does look like we are due for an oversold short-term rally that may turn into an intermediate-term rally if we see the breadth in cyclicals improve. If we see the cyclical sectors lead in any near-term rally and their breadth improves in the MATA survey then the short-term rally will likely have legs. However, if the cyclicals (technology, financials, consumer discretionary) display weak performance and breadth while the non-cyclical sectors outperform, then the intermediate correction is likely to continue after the market works off an oversold condition.
52-Week Highs and Lows Data
The data for the S&P 500 for 52-week highs and lows shows a confused market. Over the past month 24% of the S&P 500 hit a 52-week high while only 4% hit new 52-week lows. What makes the backdrop in this survey a bit confusing is that one of the more cyclical sectors, consumer discretionary, has the strongest breadth with 40% of its members making a 52-week high over the last month. At the same time, of the 5 sectors with more new 52-week highs than the S&P 500, four are defensive non-cyclicals which gives a bearish tone to the market’s breadth.
That said, most of the sectors within the S&P 500 show new 52-week highs well above new 52-week lows except for the energy sector which remains a technical mess. Industrials have also weakened considerably to the point where new 52-week lows are nearly on par with new 52-week highs. Both sectors are highly influence by trends in the USD and the USD’s recent strength isn’t giving them any respite. Further strength in the USD will likely to continue to weigh on these sectors.
Source: Bloomberg
Summary
Given the above, the message provided in the surveys is an intermediate-term correction that has gone on now for 26 days and has significantly weakened the longer-term trend from bullish to nearly neutral as the 200d MA survey weakened from 79% to 61%. 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 buyers have stepped in to drive prices well off the lows over the past two days. Additionally, our intermediate term MATA survey showed fewer stocks in downtrends and more stocks that are trendless. These trendless stocks are either putting in a bottom or working off an oversold condition before beginning another leg lower. We will need to watch any short-term rally to see if the cyclicals can participate in strength to suggest that this intermediate correction is over. If we fail to rally with strong cyclical breadth or if we take out the March lows then this intermediate correction will continue and will likely weaken the market’s long term outlook from bullish to neutral.
