The markets had a positive week with the S&P 500 up 1.38%, the Dow 1.48%, and the Russell 2000 1.04%. In terms of sectors the telecommunication service sector was the star performer as it was up 3.60% with financials putting in a strong 2.72% gain, while the utility and healthcare sectors took the bottom spots.
What continues to concern me is that the market is making new all-time highs this month at the same time participation in this rally is falling, with the market’s breadth and momentum seeing increasing weakness. We’ve yet to see a weekly MACD buy signal for the markets which suggests the intermediate correction/consolidation that began in January may not be over. This is further supported by my intermediate timing indicators which reached overbought conditions in January when the market peaked and are only at neutral levels. It appears we may have some more digesting to do before the markets make sustainable new highs.
Market’s Bill of Health
S&P 1500 Member Trend Strength
For gauging the market’s trend we look at the S&P 1500, which encompasses the S&P 500 Large Cap stocks, the S&P 400 Mid Cap stocks, and the S&P 600 Small Cap stocks, and comprises more than 90% of the entire US market cap.
As shown below, the long-term outlook for the S&P 1500 is clearly bullish as 77.0% of the 1500 stocks in the index have bullish long-term trends. The market's intermediate-term outlook is on the verge of moving into bullish territory as it improved to 59% from last week’s 55.2% reading. The market’s short-term trend remains in bullish territory at 67.4, slipping from last week’s 80.8% reading.
* 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 77.0% of stocks in the S&P 1500 with rising 200d SMAs and 76.0% 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.
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 flipped back to a sell two weeks ago. The weekly signal failed to make a buy signal which is concerning as momentum may not be enough to drive the market higher.
Digging into the details for the 1500 stocks within the S&P 1500 we can see that the daily momentum for the market has weakened markedly from a reading of 83% two weeks ago to 43% this week.
The intermediate momentum of the market improved by inching up to 49.0% from last week’s 47% reading, as it moved closer to a neutral-bullish reading.
The market’s long-term momentum remains solid at a strong 74% this week, putting it well into bullish territory. That said, as shown in the chart below the market’s monthly and weekly MACD signals have been weakening as the market begins to lose some steam.
52-Week Highs and Lows Data
What continues to be encouraging about the market is that new 52-week highs continue to dominate new 52-week lows. Looking at the various market cap segments shows roughly equal strength in new highs across market capitalization, though large caps (S&P 500) appear to be taking the brunt of selling pressure with 1.8% 52-week lows seen over the last week, more than double what was seen in small caps (S&P 600).
What is confusing about the figure below is that the utility sector has the most members with 52-week highs and is a sector that is hurt by rising interest rates as it is capital intensive, while the financial sector which benefits from rising interest rates took the second spot. Given utilities were the worst performing sector this week (down 0.30%) it's quite possible the utility sector is losing its market leadership as rates move higher.
As mentioned at the opening, I am concerned about this market’s selectivity as the market has made new highs and yet there are fewer and fewer stocks pushing the market higher as selectivity becomes an issue. You can see this in the image below with the S&P 1500 hitting new highs while the percentage of stocks within the S&P 1500 hitting new 1-year highs has been diminishing.
Market Indicator Summary
Below is a multi-indicator chart of breadth and momentum in the S&P 500, which shows we reached an overbought condition in late February. With time and the recent price decline we are about half way to seeing intermediate-term bottoming conditions. Given we are at neutral it’s tough to make a clear call on the market’s direction. While we haven’t seen oversold conditions in the indicators there is no rule that they have to be before heading higher and so price is perhaps the best tool. Should the S&P 500 break out north of 1885, chances are the markets continue to rally until the indicators below reach overbought territory, though should we get a close below the 50-day moving average (currently 1832.14) we are likely in store for a deeper correction.
Summary
I am seeing divergences in the market's monthly and weekly MACD numbers, which have been declining for months. I am also seeing divergences in the percent of stocks making new 52-week highs, which is failing to confirm the market’s new high. We’ve also yet to see a weekly MACD buy signal on the S&P 500 since the sell signal given in January to suggest the corrective phase of the market is over. The neutral readings seen in my intermediate-term indicators do not shed any clue on the market’s direction, with price serving as the best key.
While I am seeing divergences in momentum and 52-week highs, the markets long-term trend and momentum remain in bullish territory and the bulls should continue to be given the benefit of doubt.