The cyclical sectors of the market have been weakening over the last few weeks warning of the possibility of a pullback. However, the cyclical sectors are leading the way today after bullish commentary from the world’s two biggest central banks.
- Bernanke Defends Asset Buying as Benefits Outweigh Risks
- Draghi Signals ECB in No Rush to Tighten Monetary Policy Soon
The recent pullback in the markets was sufficient to weaken the short-term outlook one notch from bullish to neutral-bullish. Given that the intermediate and long term outlooks remain firmly in bullish territory, the recent weakness in the markets is not likely indicative of a major top and further strength in the cyclical sectors will likely indicate that the short-term pullback is over.
S&P 500 Trend Strength
* Note: Numbers reflect the percentage of members 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 and viewing their long (200d SMA) and intermediate trends (50d SMA) shows the defensive sectors are surfacing as short-term leaders as they possess the strongest short-term breadth (% of members above their 20 day moving average). 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, 78% of S&P 500 members have rising 200d SMAs, 81.6% of members are above their 200d SMA. All ten sectors in bullish territory as at least 60% of members have rising 200d SMAs.
In terms of the market’s short-term view, we can see that the commodity-sensitive energy and materials sectors are showing the greatest weakness with only a third of its members above their respective short-term moving averages (20d). The defensive utility and consumer staples sectors are market leaders with 67.7% and 66.7% of its members above their 20d SMA.
Source: Bloomberg
Market Momentum
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 for short, intermediate, and long term momentum evaluation. Compared to last week, the percent of stocks within the S&P 500 with daily MACD BUY signals continued to weaken from 37% to 18%.
The intermediate momentum of the market weakened slightly from 82% to 79%, but remains firmly in bullish territory. Further evidence that there has been no dent in the markets longer-term outlook is that the percent of S&P 500 members with monthly MACD BUY signals remained stable at 73%.
In addition to the deterioration in the percent of S&P 500 members with daily MACD buy signals, the S&P 500 Index itself is on a daily sell signal, the first sell signal since the end of December.
52-Week Highs and Lows Data
Despite the market’s weakness over the past week we still saw more than a fourth of the 500 members within the S&P 500 hit new 52-week highs over the last five days with the consumer staples sector leading the charge with nearly half its members hitting new highs. Current new highs at 28.6% trumps new lows at 1.40%, indicating the bulls continue to be the driving force in the market.
Source: Bloomberg
Summary
The market continues to work off its overbought condition with the short-term outlook downgraded one notch. As the cyclical sectors lead the markets during the correction, it is healthy to see them now leading on the upside, which may be a sign that the current pullback has come to a conclusion. Continued strength in the cyclical sectors would likely lead to the short-term outlook for the markets being upgraded back to bullish territory.
