Consolidation or Top? Key Watch Points Going Forward

Fri, Apr 25, 2014 - 5:48pm


  • Energy sector remains the hot spot as ETF inflows surge
  • Large outflows from large cap equities
  • Energy and Utilities are leaders, Technology and Cons. Discretionary are laggards
  • Market’s momentum continues to weaken
  • 52-Week Highs/Lows suggests consolidation rather than top
  • NASDAQ most oversold since November 2012 lows; momentum building

The markets have made virtually no progress this year as momentum has stalled. The number one question is whether stocks are taking a breather before heading higher or, conversely, setting up for a larger decline. One important trend indicator, 52-week highs and lows, is still supportive and suggests the market is in the process of consolidating. The NASDAQ, as well, has taken quite a beating and resembles similar characteristics to the November 2012 lows. With that said, we need to see the NASDAQ clear its 50-day moving average to have conviction the market is headed higher, or a more serious correction may be in the offing.

Follow the Money – Weekly ETF Flows

When looking at inflows and outflows into major exchange traded funds (ETFs), we can see large outflows from big cap stocks with nearly $1B coming out of the SPDR S&P 500 (SPY) and $786M flowing out of the Powershares QQQ Trust (QQQ), with large outflows also seen from the small cap iShares Russell 2000 (IWM). Energy was the clear winner during the week with $863M of inflows followed by long-term US Treasury Bonds (TLT) with nearly half a billion. The industrial sector also fared well with $439M in inflows.

Source: Bloomberg

The large shift into the energy sector over the last week has pushed the XLE into the fop fund for year-to-date inflows at close to B while the SPDR S&P 500 ETF (SPY) has lost nearly B, which is peculiar since the iShares Core S&P 500 ETF (IVV) has seen nearly B in inflows. The SPY has 8B in assets while the IVV has B, and so it could be that hot money (hedge funds) are using the SPY’s greater liquidity to trade the market’s swings this year and may reflect more hedge fund sentiment than overall market sentiment towards large-cap stocks.

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

Market’s Weekly Bill of Health

S&P 1500 Member Trend Strength

As shown below, the long-term outlook for the S&P 1500 is clearly bullish as 77% of the 1500 stocks in the index have bullish long-term trends. The market's intermediate-term outlook moved further into bullish territory as it rose from 64% two weeks ago to 73% this week. The market’s short-term trend crawled its way up a notch as it is barely in neutral-bearish territory this week by rising to 41% from 38% two weeks ago.

* Note: Numbers reflect the percentage of members with rising moving averages: 200-day moving average (or 200d MA) is used for long-term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short-term outlook.

The most important section of the table below is the 200d SMA column, which sheds light on the market’s long-term health. As seen in the far right columns, you have 77% of stocks in the S&P 1500 with rising 200d SMAs and 62% of stocks above their 200d SMA. Also, all ten sectors are in long-term bullish territory with more than 60% of their members having rising 200d SMAs. We are seeing downside leadership in the consumer discretionary and technology sectors which is a concern given their collective 32% market weight. Conversely, the strongest areas of the market like energy and utilities make up only 12% of the market and aren’t large enough to carry the market higher unless the larger sectors get in gear.

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. The daily MACD is on the verge of flipping back to a sell signal and what is even of greater concern is that, despite the strong rally off the February lows we never saw the weekly MACD sell flip from a sell to a buy, which suggests the consolidation we’ve been having since the middle of January isn’t over yet. That said, it should not be forgotten that the market’s long-term momentum remains bullish as we’ve had a monthly buy signal in place since 2012.

Source: Bloomberg

Digging into the details for the 1500 stocks within the S&P 1500 we can see that the daily momentum for the market has improved from 25% on buy signals two weeks ago to 59% currently as the short-term momentum (daily) has moved into neutral-bullish territory.

The intermediate momentum of the market also weakened by falling to 34% from 35% two weeks ago and remains in neutral-bearish territory as the market’s consolidation continues.

The market’s long-term momentum remains in bullish territory at 67% this week, though it has fallen from 77% a month ago. The best way to read the table below is that we have strengthening short-term momentum but it hasn’t been enough to improve the markets intermediate-term momentum within the confines of a bull market as long-term momentum remains in bullish territory.

Source: Bloomberg

You can see the weakening momentum of the market below where the monthly MACD buy readings peaked in the fall of 2013 and we continue to see a negative divergence in weekly buy signals that are showing lower lows while the market shows higher highs. The take away from all of this is that the foundation of the market has deteriorated with the loss in momentum, while the long-term picture still remains in bullish territory. This either means the market is in a consolidation mode before heading higher or setting up for a more meaningful top. Continued deterioration in breadth and momentum would suggest a greater decline is in the offing.

Source: Bloomberg

52-Week Highs and Lows Data

Looking at the loss in weekly and monthly MACD momentum indicates either a consolidation or a more meaningful top is in the works. However, looking at 52-week high data is much more encouraging and indicates the loss in momentum has not been sufficient enough to push stocks to new 52-week lows but rather just moderate their upward price movements. This is seen when looking at the table below which shows that new highs across various market caps still outnumber new lows.

Source: Bloomberg

Market Indicator Summary

Below is a multi-indicator chart of breadth and momentum in the NASDAQ. The takeaway message from the multi-indicator chart is that the NASDAQ, which has led the decline along with the small cap Russell 2000 Index, is the most oversold it has been since the November 2012 lows. The November 2012 low proved to be a significant bottom in the markets in which strong gains followed. Out of the November 2012 oversold condition we saw a surge in momentum as the % of stocks on daily MACD buy signals over a 10-day period surged to nearly 40%. As of today we have the biggest surge in buy signals since that November 2012 bottom, currently at 27.5% and rising. What confirmed the bottom was when the NASDAQ definitively reclaimed its 50 day moving average, and we would also like to see the same to put the final nail in the coffin that a significant bottom is in.

Source: Bloomberg

What makes the similarities to the November 2012 lows even more striking is that outflows from the Powershares QQQ Trust (~ Nasdaq 100), over the 20-day period in mid-April exceeded those in June/November of 2012, indicating a washed-out bottom.

Source: Bloomberg


So far we’ve seen the market churn sideways as the momentum of the market continues to weaken. This is always the case with consolidations but the major question is where do we go from here? So far we have significant market rotation into energy and out of the technology and consumer discretionary groups with the utility sector leading in performance. Given the sectors that are leading carry such a small collective weight in the market indexes, it isn’t surprising their strength has not been enough to move the markets higher. For that to occur we need to see the technology, financial, and consumer discretionary groups gain some strength. There is still hope given the NASDAQ is the most oversold it has been since the November 2012 lows along with surging momentum, but to rule out a dead-cat bounce we need to see the NASDAQ reclaim its 50-day moving average. Until that occurs, defense is probably the best strategy going forward.

About the Author

Chief Investment Officer
chris [dot] puplava [at] financialsense [dot] com ()