Logo Background RSS


Market Health Update: Possible Short Term Top

  • Written by Syndicated Publisher No Comments Comments
    January 18, 2013

    The rally since the start of the year has continued to improve the S&P 500’s long term, intermediate term, and short term trends as all firmly display bullish readings with more than 60% of S&P’s 500 stocks having rising moving averages. However, there are some signs that internals are weakening on a short term basis that may argue for a further pause or mild pullback. That said, given that the S&P 500’s intermediate-term momentum remains strong (see MACD section below), any short-term correction that takes place is likely to be mild, helping to work off an overbought condition before the market heads higher.

    S&P 500 Trend Strength
    trend summary

    * 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 shows an underlining message of accelerating global growth. Like last week, two of the top sectors showing the most bullish trends are the industrials and material sectors, both levered to global growth. The other standout is the financial sector which is likely benefitting from a steeper yield curve as that helps boost their interest margin. Overall, we see that the bulk of the stock market is in bullish trends and the most cyclical sectors are leading while the defensive sectors (consumer staples, utilities, and telecommunications) are lagging which gives the markets a bullish tone.

    trend table
    Source: Bloomberg

    Market Momentum

    The Moving Average Convergence/Divergence (MACD) technical indicator below is used to gauge the S&P 500’s momentum, on a daily, weekly, and monthly basis. Compared to last week, the percent of stocks within the S&P 500 with daily MACD BUY signals fell from 76% to 67% despite the market closing on a higher weekly close, indicating a loss in momentum despite higher prices. That said the intermediate momentum of the market improved as 72% of the S&P 500 members have weekly MACD BUY signals, up from 68% last week, while the long term momentum of the market was unchanged as 62%. The evidence appears to suggest the potential for a short-term top that works off overbought conditions while the improving intermediate momentum of the market suggests that once a short-term correction is over we are likely to see new highs ahead.

    macd 1

    While we are seeing some weakening in the markets short-term momentum we are not seeing the same level of divergence that occurred prior to the September 2012 top, which again suggests to me any pullback should be mild in nature and not lead to a significant correction in the market.

    sp500 and momentum trends
    Source: Bloomberg

    52-Week Highs and Lows Data

    We have a well-represented market rally as more than one fifth of the entire S&P 500 hit a 1-year high in the last five days. What is also encouraging is that, like the trend summary above, the two leading sectors are geared towards global growth (materials, industrials) which appears to be accelerating as materials and industrials tend to underperform when global growth slows. Additionally, the financial sector is highly cyclical and the fact that the financial sector is one of the top sectors suggests that both global and domestic growth remains positive.

    52 week highs lows
    Source: Bloomberg

    As highlighted in the momentum section above, we are seeing a little deterioration in the short-term that would suggest a mild pullback is possible before we take out the 2012 highs. For example, leading into tops we see less and less stocks participating in a rally even though the market averages head to new highs. This was the case prior to the April 2012 highs or the September 2012 top where new 52-week highs on US exchanges began to decline even though the market headed higher. While the market has taken out its early January 4th highs the number of stocks hitting new 52-week lows is lower now than where it was on January 4th, suggesting a loss in participation in the rally. The negative divergences suggest we may see a mild correction to alleviate the market’s overbought condition.

    52 week chart
    Source: Bloomberg


    The market continues to march higher in 2013 as the short-term to long-term trends and momentum for the S&P 500 remain bullish. That said we are seeing some slight deterioration in the daily readings for MACD BUY signals as well as 52-week high data that suggests we may be in for a mild correction to help alleviate the market’s overbought condition. Nothing goes straight up so some back-and-filling in the markets is healthy. Because the market’s intermediate-term and long-term trends and momentum continue to improve, it is likely that after a short pullback the markets will march to new highs.

    One thing to mention, while some internal deterioration in the market’s internals on a short-term basis suggests a mild pullback, there are however a couple technical signs the market will simply move higher. We have a bullish flag breakout that suggests the S&P 500 heads north near 1550, with an inverse head-and-shoulders bottom forming since September that suggests if we clear 1480 we should rally up close to 1600 and hit a new all-time high. There is some justification for this also given that the S&P 400 midcap index, the S&P 600 smallcap index, and the Russell 2000 smallcap index have already hit new all-time highs. Their large cap peers (S&P 500) may be the next in line.

    Source: Bloomberg

    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.