Market Health Update: Trend and Momentum Strengthen

Written by Syndicated Publisher No Comments
October 22, 2013

All of the major market indexes hit new all-time highs as the fiasco in Washington was put behind us. The markets long-term trend and momentum strengthened as did the intermediate outlook with this week’s advance. With various indicators not yet at extremes, the current rally may continue into next week before taking a breather.

S&P 500 Member Trend Strength

As shown below, the long-term outlook for the S&P 500 is clearly bullish as 87.4% of the 500 stocks in the index have bullish long-term trends, up from a reading of 85% two weeks ago. The market’s intermediate-term outlook has also improved, jumping from 50.4% two weeks ago to 58.6%, putting it on the verge of an upgrade to bullish territory. The market’s short-term outlook softened from last week’s 77.2% reading to this week’s 56.6% level. What is most important is in the market’s strong long-term outlook, which is still deep into bullish territory and does not suggest a market top is forming.

* 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 87% of stocks in the S&P 500 withrising 200d SMAs and 84.8% 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.

click for link) in which they looked at all major market tops since the Great Depression and found selectivity is a hallmark of all market tops. Simply put, participation in the bull market fades as individual stocks enter their own private bear markets well before the market peaks. On average, 17.26% of stocks were at or within 2% of their 52-week highs on the day the market peaked while 22.26% were off by 20% or more from their highs, indicating more stocks were experiencing bear markets than were participating in rallying to new highs. For this reason, a look at 52-week breadth of the markets is helpful in detecting an approaching bull market top.

The market continues to display impressive internals that do not suggest a market in danger of rolling over into a bear market. For example, there are 38% of stocks within the S&P 1500 that are within 2% of their 52-week highs while only 9% are experiencing bear markets, a comfortable margin relative to the average found by Lowry Research. The S&P 600 (Small Caps) shows the weakest margin between those near new highs (36%) and those in bear markets (14%).