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New Update: Weekly Market Bill Of Health

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    July 1, 2013

    Short Term Loss in Momentum Continues While Long Term Outlook Remains Firm

    The bearish engulfing pattern on Wednesday May 22nd marked the top for the November-May advance and the markets short and intermediate-term trends have continued to weaken. While the short and intermediate outlooks continue to weaken, the markets longer term trend and momentum remain firmly in bullish territory and many market indicators are reaching levels associated with intermediate lows, indicating we are likely near or at a bottom in the markets.

    S&P 500 Member Trend Strength

    As shown below, the outlook for the S&P 500 is clearly bullish as more than 83.4% of the 500 member-index have bullish long term trends. The markets intermediate outlook is barely bullish while the market’s short term outlook is fairly bombed out at a 22.2% reading. While we have seen the market’s short term weakness soften the market’s intermediate outlook, there has not been enough damage to weaken the market’s long term outlook, which is the most important outlook of all.

    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.

    Breaking out the 500 stocks within the S&P 500 into their respective sectors and viewing their long (200d SMA) and intermediate trends (50d SMA) shows the cyclical sectors on a short term basis (energy, materials, industrials) are surfacing as short-term laggards as they possess the weakest short-term breadth (% of members above their 20 day moving average), while the defensive sectors like telecommunication and utilities are showing the worst intermediate trend as they have the fewest members above their 50d SMA.

    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 83% of the S&P 500 members with rising 200d SMAs and 80.6% of its members above their 200d SMA with nine out of ten sectors in bullish territory with more than 60% of their members having rising 200d SMAs. The three sectors showing the healthiest overall trend are the consumer staples, financials, and industrial sectors as they have the best long term and intermediate-term trends.

    TREND table
    Source: Bloomberg

    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 for short, intermediate, and long term momentum evaluation respectively. As seen in the table below, the momentum for the S&P 500 has weakened in the on a short and intermediate basis with a daily and weekly sell signal, though the marketslong term momentum remains bullish.

    MACD signals
    Source: Bloomberg

    Digging into the details for the 500 members within the S&P 500 we can see that the daily momentum for the market has weakened as the percent of stocks within the S&P 500 with daily MACD BUY signals was at 75% a month ago and bottomed at 23% last week and has moved up to 37% currently, pushing the market’s short-term momentum from deep in bearish territory to closing in on the neutral-bearish territory.

    The greatest change in the market’s momentum was a loss in its weekly momentum which fell from the high 60% range a week ago to 34% currently.

    Despite weak daily and weekly momentum readings, there hasn’t been enough loss in the market’s bullish momentum to soften the % of stocks on monthly MACD BUY signals, which currently rests at 81%.

    MACD table
    Source: Bloomberg

    We are starting to see some bullish divergence in the market’s momentum which suggests we may be at or near a low is that the % of stocks on MACD daily BUY signals is diverging with the price of the S&P 500.

    MACD chart
    Source: Bloomberg

    52-Week Highs and Lows Data

    While the market has been pretty weak over the last month the greatest shining star is the financial sector with the regional bank industry hitting a 52-week high this week and over 16% of the financial sector members hitting a 52-week high over the last 5 trading days. With such strong performance in the face of a weak market, the financial sector is likely to emerge as new leadership in any advance that develops out of this corrective phase.

    52 week
    Source: Bloomberg

    Technical Snapshot

    The chart below shows the S&P 500 on top along with several panels of market breadth and momentum. We can see that the % of stocks within the S&P 500 above their 20d and 50d SMA has fallen to levels associated with intermediate lows as was seen at the June and November 2012 lows (2nd panel). Also, the % of members with an RSI less than 30 (extreme bearish momentum) is diverging with price and suggested a possible market turn to the upside (3rd panel). The bottom panel shows the % of stocks with MACD lines above a baseline of zero, which also currently rests at levels common with intermediate lows.

    technical
    Source: Bloomberg

    Summary

    The market has been in corrective mode since May 22nd and we have seen damage done to its short and intermediate outlook. That said, the markets long term trend and momentum remain firmly in bullish territory and current breadth and momentum readings are resting at levels associated with intermediate lows, likely providing investors with an opportunity to put money to work in an ongoing bull market.

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    Image: Flickr (licence attibution)

    About The Author – Chris Puplava, Financial Sense Online

    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.

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