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Market Health Update: Short-Term Overbought

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    September 15, 2013

    As mentioned in last week’s Market Bill of Health (click for link), 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 next 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.

    market trend strength
    * 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%.

    trend table
    Source: Bloomberg

    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.

    macd signals
    Source: Bloomberg

    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.

    percent macd buy signals
    Source: Bloomberg

    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.

    macd bottoms
    Source: Bloomberg

    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.

    52 week high low

    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 next week to work off the overbought condition.

    short term overbought
    Source: Bloomberg


    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.

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    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.