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Market Health Update: Intermediate Outlook Downgraded

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    November 9, 2012

    As of today, the Dow, NASDAQ, and Russell 2000 have broken below their 200 day moving averages. The recent decline has further eroded the S&P 500’s intermediate trend of 72% of its 500 members in bullish intermediate trends in early October to the present reading of 48.6%, which led to a further downgrade in the market’s intermediate trend to neutral-bearish. Further weakness in the markets will likely push the intermediate outlook to outright bearish, if it falls below 40%, and would also likely cause the market’s longer term outlook to be downgraded as well.

    S&P 500 Trend Strength
    trend summary
    * Note: For further explanation of the market surveys and background on analysis, please click here.

    200 Day Moving Average Evaluation – Long Term Trend Determination

    As shown in the table below, the net percentage of stocks that are in long term uptrends fell to 61.4%. In terms of sectors, the financial and telecommunication sectors take the top spots as both have 75% of their members above their 200 day moving averages. The absolute worst sector is technology as only 40% of its members are above their 200 day moving averages.

    200 day

    Moving Average Trend Analysis (MATA) – Intermediate Term Trend Determination

    The MATA survey for the S&P 500 has weakened in the last few weeks from 72% to 48.6% and a further decline below 40% would cause the S&P 500’s intermediate outlook to be downgraded from neutral-bearish to outright bearish. Of the ten sectors in the S&P 500, the financial sector continues to show decent breath with 64% of its members in bullish intermediate trends.

    moving average trend

    52-Week Highs and Lows Data

    The data for the S&P 500 for 52-week highs and lows shows fairly broad-based strength with both cyclical and non-cyclical sectors participating. Over the past five days we have 11.02% of the 500 stocks within the S&P 500 hit 52-week highs while only 2.60% have seen new 52-week lows. One trend that is interesting is that industrials and materials take the second and third spot for best breadth which implies that global growth should be picking up given their export nature.

    52 week highs lows
    Source: Bloomberg

    Sector & Asset Class Rotation

    Below is the relative rotation graph from Bloomberg that shows both the relative momentum and relative performance of assets versus a benchmark. Numbers north of 100 show improving relative momentum while numbers below show weakening relative momentum to the benchmark, and numbers to the right of 100 show outperforming assets and to the left underperforming assets.

    Market Cap Rotation

    Over the last few weeks we have seen small caps (SML) lose some of the momentum they had a month ago while megacap stocks (OEX) continue to weaken. The midcap space (MID) appears to be holding up the best in this decline as their momentum has not weakened and is slightly strengthening even further.

    Weekly Market Cap Relative Performance to S&P 500
    market cap relative performance 
    Source: Bloomberg

    Sector Rotation

    Reflective in the strong intermediate and long term trend breadth of the financial sector in the surveys above is the relative performance of financials shown below whose relative performance momentum continues to improve on a weekly basis. The greatest comebacks lately have been the defensive utility and consumer staples sectors.

    Weekly Sector Relative Performance to S&P 500
    Source: Bloomberg

    Fixed Income Rotation

    The message of shying away from risk assets is also present in the fixed income market. Over the last quarter the emerging bond market (EMB) has lost its bullish relative momentum to the UST market (TLT), with investment grade corporates (LQD), high yield (HYG), and preferreds (PFF) also beginning to weaken against USTs on a trailing quarterly basis.

    Weekly Fixed Income Relative Performance to iShares Barclays 20+ Year T-Bond
    fixed income performance
    Source: Bloomberg


    The market’s long-term and intermediate-term trend have both weakened with the intermediate outlook on the verge of turning bearish (<40% reading) while the market’s longer-term outlook is on the verge of moving from bullish to neutral-bullish. Unless the markets stabilize in the near term this current intermediate term correction may accelerate as three of the major four indexes (Dow, NASDAQ, RUSSELL 2000) have broken through their 200 day moving averages.

    Image: Flickr (licence attibution)

    About The Author

    Chris graduated magna cum laude with a B.S. in Biochemistry from California Polytechnic State University, San Luis Obispo. He joined PFS Group in 2005 and is currently pursuing the designation of Chartered Financial Analyst. His professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam. He manages PFS Group’s Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account. Chris also contributes articles and Market Observations to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava’s clients only—with other members of the trading staff. Chris enjoys the outdoors.