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Market Health Update: Defensive Decline Likely Just Market Pause

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    December 15, 2013

    The strong November payrolls data released last Friday led to a sell-off in the market as they increased the odds of a December taper announcement. The S&P 500 fell 1.65% during the week with small caps faring the worst; the Russell 2000 was down 2.15%. Typically, during down moves in the market, defensive sectors outperform but it was actually the defensive sectors that led this week’s market decline with a 2.62% decline in health care, a 2.43% decline in the telecommunications sector, and a 2.42% decline in utilities. The fact that the defensives led the market decline this week adds support to the notion this is a healthy pause.

    S&P 500 Member Trend Strength

    As shown below, the long-term outlook for the S&P 500 is clearly bullish as 83.0% of the 500 stocks in the index have bullish long-term trends. The market’s intermediate-term outlook has also improved a bit, rising from 70.2% last week to 74.4% this week. The market’s short-term actually worsened as it fell from last week’s bullish reading of 61.6% to fall into neutral-bullish territory at a 51.8% reading. What is most important is the market’s strong long-term outlook, which still 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 83% of stocks in the S&P 500 with rising 200d SMAs and 76.8% of stocks above their 200d SMA. Also, eight out of ten sectors are in long-term bullish territory with more than 60% of their members having rising 200d SMAs with the utility sector the weakest of the bunch.

    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 daily MACD for the S&P 500 went on a sell signal in early December and remains on a sell signal while the intermediate (weekly) and long-term (monthly) outlook’s remain on buy 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 slipped to 20.0%, down from a reading of 77% a month ago as it has slipped deep into bearish territory. Readings below 20% have often marked intermediate lows and so we need to be on the alert for a rush of buyers coming in to signal an important low.

    The intermediate momentum of the market slipped a notch as it fell from 62% last week to 52% this week, putting it in neutral-bearish territory.

    The market’s long-term momentum remains solid at a strong 76% this week, putting it well into bullish territory.

    Source: Bloomberg

    We had been seeing the daily MACD buy readings hitting a series of lower highs as momentum was fading and we warned continued weakness in the daily numbers would eventually pull down the weekly numbers, which has happened as the weekly readings have been steadily worsening.

    Source: Bloomberg

    52-Week Highs and Lows Data

    What continues to be encouraging about the market’s advance is that it is broad based as even during this week’s decline there were 7 new 52-week highs for every 52-week low in the S&P 1500 Composite. Regardless of market cap, as seen below new highs continue to dominate new lows.

    Source: Bloomberg

    In terms of sectors, it’s encouraging that the top two sectors leading in new highs are cyclical sectors, with the materials sector (25.8%) and the technology sector (24.6%) leading the market in new highs.

    Source: Bloomberg

    When graphically looking at new highs and new lows for the S&P 1500 super composite, we can see visually that the bulls have been dominating all year with the spike in new highs during market rallies far and above the spike in new lows during pullbacks. Only when we see the spike in new lows during declines exceed the spike in new highs during rallies will the market be in serious trouble.

    Source: Bloomberg


    The market’s long-term outlook remains firmly bullish and the recent pullback this week looks corrective in nature as the decline is being led by defensive sectors like health care and telecommunications. Once we get the Fed meeting uncertainty behind us next Wednesday, there is a good chance we get the normal seasonal Santa Claus rally to carry us higher to close out the year.

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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.


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