The markets had a positive week last week, with the S&P 500 up 0.40%, the Dow 0.55%, and the Russel 2000 0.14%. In terms of sectors the telecommunication service sector was the star performer as it was up 1.40% with materials matching the telecom sector with a 1.40% gain, while the technology sector took a beating on Friday (down 2.23%) and was the only sector down for the week by sliding 0.64%.
As was stated several weeks ago in “Market Momentum Beginning to Fade: Are Stocks Losing Steam?”, I continue to see a loss in momentum and breadth in the current rally, which suggests we are on a much weaker foundation than was seen in 2013. This also makes the market more vulnerable to a decline. Interestingly, while US markets are beginning to show signs of exhaustion, there are signs of life in emerging markets, which is shown in the ETF flows section below.
While there are signs we may be in store for a deeper correction than we’ve seen in some time, it’s important to point out that many market participants are already positioned for a large decline as seen by a large short interest on the NYSE. This indicates the potential for a short squeeze in the market should a positive catalyst surface and why the bears should play it cautious by not pressing their bets too far.
Follow the Money – Weekly ETF Flows
When looking at inflows and outflows into major exchange traded funds (ETFs), we can see this past week was about a shift in risky assets from small cap stocks to emerging markets. The iShares Russell 2000 (iShares Russell 2000 Index (ARCA:IWM)) saw $884M in outflows while emerging market equities like the iShares MSCI Emerging Markets ETF (ARCA:EEM) and Vanguard FTSE Emerging Markets ETF (ARCA:VWO) saw $1.7B and $324M in inflows respectively. We are also seeing inflows into emerging market debt as $442M moved into the iShares JP Morgan USD Emerging Bond fund (EMB).
Source: Bloomberg
The shift into emerging market equities we are seeing over the last few weeks is the first positive flow since the stabilization seen last summer when EEM rallied more than 20%.
Source: Bloomberg
As of now, there are no clear signs that the positive movement into emerging market equities is slowing, particularly when viewing flows into emerging market bonds (EMB), which have experienced a large surge recently.
Source: Bloomberg
Market’s Weekly Bill of Health
As shown below, the long-term outlook for the S&P 1500 is clearly bullish as 78.4.0% of the 1500 stocks in the index have bullish long-term trends. The market's intermediate-term outlook never made it into bullish territory during the rally and remains stuck in neutral-bullish at 58.2%. The market’s short-term trend slipped down into neutral-bullish territory this week by falling from 67.4% two weeks ago to the present 57.2% 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 78% of stocks in the S&P 1500 with rising 200d SMAs and 74% 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, technology, industrial, and health care sectors. This is a big concern for the markets as they collectively make up 56% of the weight in the S&P 1500. Conversely, the strongest areas of the market like energy, materials, telecom, and utilities make up only 18% of the market and aren’t large enough to carry the weight of the market higher.
Source: Bloomberg
S&P 500 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 fallen from 67.4% on buy signals two weeks ago to 59% currently as the short-term momentum (daily) has slipped into neutral-bullish territory.
The intermediate momentum of the market also weakened by falling to 45% from 59% two weeks ago and slipped from neutral-bullish to neutral-bearish.
The market’s long-term momentum remains solid at a strong 72% this week, though it has fallen from 77% two weeks ago. The best way to read the table below is that we have weakening short-term and intermediate-term momentum that has not been strong enough nor lasted long enough to push the market’s long-term momentum out of bullish territory, though it has softened from 2013.
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 foundations of the market have deteriorated with the loss in momentum, though the long-term trend and momentum still remain in bullish territory.
52-Week Highs and Lows Data
What continues to be encouraging about the market is that even in the midst of flat trading we still have way more new 52-week highs than lows and this suggests there is still more right than wrong with this market, with the strongest internals being seen in the mega (S&P 100) and large cap (S&P 500) stocks while small cap (S&P 600) shows the weakest internals.
Market Indicator Summary
Below is a multi-indicator chart of breadth and momentum in the S&P 500, which shows we are above neutral readings on most of my intermediate-term indicators and suggests this market is a long ways off from being considered oversold and we may have more to fall before a short-term bottom is formed.
Source: Bloomberg
While we may have just kicked off a correction this past Friday that may have more to go, I wouldn’t get overly bearish as short interest on the NYSE is already at elevated levels and indicates bearish sentiment is already near levels that have marked major lows since the 2009 bottom and may indicate that the downside potential of a market correction will be limited.
Source: Bloomberg
Summary
The most important takeaway from this report is that the long-term trend and momentum of the market still remains in bullish territory; however, we have seen a loss in market momentum at intermediate-term levels, which suggests we are now on a weaker footing than was seen in 2013. We need to see stronger participation in the sectors that have large weights in the indexes like consumer discretionary, technology, and industrials for this market to gain some traction, and until we do we are likely to trade sideways at best or see a further decline at worst. That said, given that short interest levels are already high compared to prior spikes during past corrections, the downside potential of any decline may be limited.