Breadth Wanes, Small-caps Stall, Bearish Sentiment Surges, Bonds and Oil Break Out, Gold Plunges (Premium)

The stock market remains in a funk. Large-caps finally pulled back with the S&P 500 loosing a whopping 2% from high to low (Sept 2 to 14). SPY remains is a clear uptrend with a rising channel and QQQ has not touched its 50-day SMA since June 3rd. Things are different outside of the S&P 500 because small-caps and mid-caps have gone nowhere since March and May, respectively. This is reflected in waning breadth within the S&P 500. Thus, small-caps and mid-caps are in correction mode, but large-caps have yet to join. With the 2% decline in the S&P 500, the percentage of bears in the AAII survey shot to 39%. Today’s commentary will include two AAII charts with signal analysis.

Breadth Wanes, but Cup half Full

Breadth continues to wane, but the cup is still half full overall. The green line in the top window shows SPY moving higher since mid May, while the red lines show the breadth indicators moving lower. Even so, 72% of S&P 500 stocks are above their 200-day SMAs, 63% are above their 150-day SMAs and 52.6% are above their 100-day SMAs. These levels are the lowest since late October and early November, which is when the most recent leg higher began.

The blue shadings on the chart below show when %Above 150-day hits the 55-65 percent zone and when %Above 100-day hits the 40-50 percent zone. These indicators bounced off these zones in September and October 2020. The bounce in late October and early November 2020 was especially strong (green arrows). A similar move now would show an expansion of upside participation and this could be bullish for mid-caps and small-caps. Until such a surge, breadth continues to wane as SPY moves higher and this shows less participation.

IWM Stuck in Range with Bull Flag

Any signs of an improvement in breadth will show up in small-caps, which have gone nowhere since March. The chart below was created in Amibroker so bear with me here. The bar chart shows a big trading range with a possible bull flag over the last few weeks. A breakout at 224 would be short-term bullish and increase the chances of a bigger range breakout. This is an example of short-term pattern (flag) within a longer-term pattern (trading range). A flag breakout could give traders a jump on a range breakout.

The top indicator window shows RSI (14) in the 40-50 zone (blue oval), which I consider a mild oversold condition. I am not showing the Momentum Composite because it’s value is 0. The bottom indicator window shows StochClose turning green on September 2nd (green circle) as it crossed above 60 (uptrend signal). Thus, we have an uptrend signal, a mild oversold condition and a bull flag. The middle window shows StochRSI and a pop above .80 would show an short upward momentum thrust.

I ran out of time today and will not be able to update the recent trend signals in the high-beta ETFs (BETZ, ARKK, UFO …). Instead, I will post an update on Monday.

Percentage of AAII Bears Surges

I don’t really use sentiment indicators, but the AAII indicators are making waves this week so I will cover two charts. AAII percent bears surged to 39.3% and percent bulls dropped to 22.40%. As a result, net bull-bear percentage plunged to -16.90%, the first negative reading since September 2020. Note that the remaining 38.3% are neutral. As a contrarian indicator, this bearish shift points to excessive bearishness that could give way to an advance. But is it excessive enough? Let’s look at some signals.

The red lines show when bull-bear net dips below -15% and the green lines show when bull-bear net exceeds +15%, levels that show modest excess. The November 2019 dip below -15% preceded the stock market plunge in December 2019 and the February 2017 dip preceded a correction the next six weeks. Not very contrarian. The April 2018 dip, however, nailed the spring low that year for a true contrarian signal. We can also see that “excessive” bullishness kicked off big advances in September 2017, October 2019 and November 2020. Hmm…that’ really not the way this indicator is supposed to work. Overall, the record for this level of excess is mixed, at best.

These AAII sentiment indicators are probably best used for some serious extremes, such as above 50%. The next chart shows when percent bulls exceeds 50% (green) and when percent bears exceeds 50% (red). There were only seven extreme groupings over the last five years. The January 2018 bullish extreme marked a blow-off top, but the November 2016, November 2020 and March-April 2020 bullish extremes did not lead to a correction or market decline. Quite the opposite, in fact.

The three bearish extremes were in December 2019, March 2020 and May 2020. The December 2019 bearish extreme nailed the bottom for an excellent contrarian call. The March 2020 extreme was a week or two early, but ended up marking an important low. Percent bears exceeded 50% again in May 2020 and the S&P 500 continued higher.

Lessons here…bullish extremes in seasonally bullish months can be powerful signals, but not as contrarian signals (bullish signals). November and April are strong months from a seasonal perspective. Bearish extremes are quite rare and we should not get too bearish when the percentage of bears exceeds 50%.

Other Notes

Seasonally, September is the weakest month of the year for the S&P 500, but price action remains strong for large-caps (click here for full report on seasonal patterns).

The Composite Breadth Model (CBM) remains bullish and has been bullish since May 2020 (see Market Regime page for charts covering the CBM, yield spreads and Fed balance sheet).

Investment grade and junk grade corporate bond spreads flattened and remain at low levels since July. There are no signs of stress in the credit markets.

Also note that the Junk Bond ETF (JNK) and High-Yield Bond ETF (HYG) broke out of consolidation patterns in late August and hit new highs this week. The chart below was made in Amibroker and shows StochClose for JNK in the middle window. The line is green when there is an active bullish signal (uptrend) and red when there is an active bearish signal (downtrend). StochClose is currently at 96.45 and has remained largely above 60 for over a year.

The Fed balance sheet surged $91 billion and hit another all time high. No signs of tapering here.  

The 20+ Yr Treasury Bond ETF (TLT) is in a long-term uptrend and broke flag resistance this week.

The Gold SPDR (GLD) is in a long-term downtrend and plunged over 2% on Thursday.

The Dollar Bullish ETF (UUP) is in a long-term uptrend and surged off support on Thursday.

Oil is in a long-term uptrend and broke out of a falling channel.

TLT Breaks out of Flag

The 20+ Yr Treasury Bond ETF (TLT) triggered an uptrend signal on July 8th, formed a bull flag above its 200-day SMA in August-September and broke out this week. The flag is a bullish continuation pattern and this breakout signals a continuation of the May-July advance. The low just before the flag breakout marks the first support level to watch for signs of a failure. Adding a little buffer, a close below 146 would call for a re-evaluation. The indicator window shows RSI dipping into the 40-50 zone (mild oversold) in August-September and the candlestick chart shows subsequent StochRSI pops, the last of which occurred on September 9th. StochRSI(10) is the Stochastic Oscillator(10) applied to RSI(10). A StochRSI pop signals a short-term momentum thrust that can jump start a breakout.

Gold Plunges for Third Time since June

The Gold SPDR (GLD) plunged over 2% in one day for the third time since June (yellow shading). The first plunged occurred when StochClose was still bullish, while the last two occurred while StochClose was bearish. Also note that StochClose for the Dollar Bullish ETF has been bullish since June 23rd and the Dollar surged on Thursday. I did not see the news or reason, nor do I care because I do not have the resources to investigate every macro influence on the Dollar or gold. GLD was at a moment of truth as it tested short-term support, which clearly gave way. The bigger downtrend remains the dominant force at work for gold right now.

Dollar Surges off Short-term Support

StochClose is bullish for the Dollar, bearish for the Euro and bearish for the Yen. Both the Euro ETF (FXE) and Yen ETF (FXY) firmed the last few weeks, but remain short of breakouts and in downtrends overall. UUP remains in a large trading range and the cup is half full because it is in the upper half of this range. RSI dipped below 40 last week and the Momentum Composite dipped to -3 for an oversold condition on September 3rd (red line) and this gave way to a bounce off support. The cup will remain half full as long as UUP holds the August-September lows (green line).

Oil Breaks Out of Channel

Oil remains in a long-term uptrend and broke out of a falling channel this week. The falling channel is viewed as a correction within the bigger uptrend and the breakout signals a continuation of this uptrend. A move above the summer highs is expected as long as the breakout holds. The early September lows mark the first support level to watch (67.50). Prior to the breakout, note that the Momentum Composite hit -3 to become oversold on August 19th and 20th. There was then a StochRSI pop on August 24th and strong follow through this week. Keep this setup in mind: long-term uptrend, short-term oversold, StochRSI pop.

Thanks for tuning in and happy Friday!

-Arthur Hill, CMT
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