Market's Bill Of Health - Short-Term Overbought

As mentioned in last week’s Market Bill of Health (here), I said that we had likely reached “escape velocity” as more than 15% of the entire S&P 500 had seen a daily MACD buy signal over the last ten days and that the August correction was likely over. The S&P 500 continued on its bullish momentum and ended up nearly 2% on the week with the Dow logging in its best week since January. That said, while the August decline is likely over we have reached short-term overbought conditions and it’s likely the market stalls this coming week, particularly heading into a major FOMC meeting on the 17th and 18th.

S&P 500 Member Trend Strength

As shown below, the long-term outlook for the S&P 500 is clearly bullish as 88.0% of the 500 stocks in the index have bullish long-term trends, up from a reading of 84.4% three weeks ago. The market's intermediate-term trend also remains in bullish territory at a reading of 71.8%, up more than 10 points from three weeks ago. The market’s short-term outlook improved significantly from a reading of 22.4% last week, which put it deep into bearish territory, to the current 53.2%, which upgrades the market's short-term trend to a neutral-bullish 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 89% of stocks in the S&P 500 with rising 200d SMAs and 80.4% 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, with the weakest sector being telecommunications at 67%.

S&P 500 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. The big change last week was the daily MACD buy signal that was registered and suggested the market’s correction was over. Despite the near 2% rally on the back of last week’s recovery, the weekly MACD still rests on a sell signal.

Digging into the details for the 500 stocks within the S&P 500 we can see that the daily momentum for the market has significantly improved with a 39% jump in buy signals from 09/06/2013 to the current reading of 86%, pushing the market’s short-term momentum firmly in bullish territory.

The intermediate momentum of the market improved modestly to 33% from last week’s 28% reading.

The market’s long-term momentum remains solid at a strong 79% this week, though it has softened a little from the 86% reading seen on July 12th.

Looking for surges in the percentage of S&P 500 stocks with daily MACD buy signals is useful for gauging short-term bottoms, with most short-term bottoms being confirmed by surges north of 80% in daily BUY signals.

The improvement in the market’s short-term momentum (daily) is now spilling over into the market’s intermediate-term momentum (weekly) as the decline in weekly MACD buy signals has been arrested with a small improvement form 28% to 33% currently.

52-Week Highs and Lows Data

The current market leaders are industrials, technology, health care, consumer discretionary, and energy, as these five sectors have the highest percentage of new 52-week highs and very few if any new 52-week lows. Of note is that 4 of the top 5 leading sectors are cyclicals which shows strong risk appetites among investors.

Market Indicator Summary

Below is a multi-indicator chart of the S&P 500 that measures breadth and momentum. The two key portions I want readers to focus on are the second and third panels. These show that the S&P 500 has reached short-term overbought conditions (see red circles) which have marked either short-term tops or pauses in an advance and suggests the market may cool off a little this coming week to work off the overbought condition.


Summary
While we have achieved escape velocity there still remains some very big market-moving events that can change the character of the market on a dime, such as a possible Syria strike, FOMC September 17-18th meeting, Fed Chairman nomination, and debt ceiling debate. That said, given the market’s long-term momentum and trend remain positive, the risk of a bear market at this point seems remote.