Market Timing Models – Signs of Narrowing Participation, but Two Biggies Keep Market Afloat

Overview and Bottom Line

Today we will start with some weekly charts to show performance since January 2018, and it ain’t pretty. I will then focus on the current bounce in the S&P 500 SPDR because it holds the key going forward. We will look at the danger zone for SPY and show that participation narrowed over the last week or so. I will also update the Index/Sector Breadth Models and finish with some Fed-related charts.

In short, I still view this as a bear market bounce. Despite some pockets of strength, the weight of the evidence is still bearish for the stock market. The Fed and Government continue to fight the bear market with unlimited asset purchases and fiscal initiatives. The competing forces could make for choppy trading in the coming weeks, perhaps months.

On Monday I will publish an update to the Weighted Average Stochastic Score (WASS) and the rotation system featured in mid January. I will also show a simpler version of this indicator that seems to work better. Moreover, I am coming to the conclusion that ETF strategies based on buy/sell signals perform better than rotational strategies.

ETFs Ranked by WASS

Note that the ETF ranking tables at the top are separate from this commentary. The ranking tables are designed to help with trend-momentum strategies. Click here for a detailed article and video explaining the Weighted Average Stochastic Score (WASS) and how it can be used for a rotation strategy.  

Big Swings and No Trend

The weekly chart shows an out of control stock market since January 2018. Using the S&P 500 as the main barometer, we can see six big swings that widened since early 2018. It started with a 12% decline and we are currently in the midst of a 30+ percent advance (low to high). As noted last week, SPY is currently trading near its January 2018 high. This means the market has been everywhere and nowhere over the last two years.

The indicator window shows weekly RSI(14) with the green and red zones marking the bull (40-90) and bear (10-60) ranges. RSI moved into its bear range in late February and remains. It needs to clear 60 to signal the start of a new bull range.

Average S&P 500 Stock Suffering

The next chart shows the S&P 500 EW ETF (RSP), S&P MidCap 400 SPDR (MDY) and Russell 2000 ETF (IWM) with the blue lines marking the January 2018 high. All three are well below this high and are down over the last 2+ years. RSP represents the average stock in the S&P 500 and the average stock is having a tough time. IWM has yet to get back above its December 2018 low and remains the weakest. Also notice that IWM peaked in January 2020, a month ahead of the other two.

Monitoring the Current Swing in SPY

The current swing is up for the S&P 500 SPDR (SPY), but it is viewed as a counter-trend bounce. SPY remains below the falling 200-day SMA, while the Index and Sector Breadth Models remain net bearish. Thus, I am still working under the assumption that we are in a bear market environment and this means I think the current bounce is a bear market rally. And one hell of a rally at that.

As the chart below shows, SPY entered the danger zone this week as it retraced 50-61.8% of its prior decline. There is a lot of strength in this bounce and it could kiss the 200-day and even break above it. Such a “bullish” event could mark the intermediate peak.

RSI is also in its danger zone (50-70) because this is where I would expect momentum to peter out on a counter-trend bounce. The S&P 500 %Above 20-day EMA (!GT20SPX) moved back above 80%, but this is also the danger zone because I view this as a mean-reversion indicator. The move above 80% shows short-term overbought conditions within a bigger downtrend.

20-day Highs Fail to Keep Pace

The next chart shows the percentage of 20-day highs (green) and lows (red). The S&P 500 powered higher on Tuesday and Friday by recording a 20-day high on both days. The percentage of 20-day highs, however, peaked on April 9th and did not get back above 30% this week. Even though upside participation is waning, we have yet to see a meaningful uptick in 20-day lows. A tick above 20% would signal trouble. The price chart shows a subjective rising wedge with support at 270. A break here would also be short-term bearish.

Equal-weights, Mid and Smalls Lagging

The massive rip-your-face-off bounce continued for SPY and QQQ this week, but equal-weights, mid-caps and small-caps did not exceed the prior week’s high. This also suggests that the advance narrowed this week and could be a warning sign. The CandleGlance chart below shows QQQ above its 200-day SMA and SPY closing in on the 200-day. The other four are well below their falling 200-day SMAs.

The indicator windows shows the 50-day Fast Stochastic to quantify the current bounce. This is basically measuring the retracement of the February-March decline. QQQ is leading with a 69% retracement and SPY is second with a 56.6% retracement. The others are well below their 50% retracement levels and lagging.

Index Breadth Model Gets Some Green

Despite another big week, there is no change in the Index Breadth Model. Seven of the nine indicators remain with bearish signals and one of these is the 10-day EMA of Advance-Decline Percent for the S&P 500. Large-caps are leading this advance, but lack of a breadth thrust reflect the S&P 500 shows the erratic nature of the advance.

Click here for an article and video explaining the indicators, signals and methodology used in the Index Breadth Model. This article also includes the signals of the last five years.

Now let’s review the key breadth indicators. There were breadth thrusts in the S&P MidCap 400 and S&P SmallCap 600 on April 9th (>30%), but the S&P 500 fell short. Note that S&P 500 AD Percent ($SPXADP) dipped below -80% on Tuesday.

There were not many new highs this week. S&P 500 High-Low% ($SPXHLP) hit +2.4% and S&P MidCap 400 High-Low% ($MIDHLP) reached +1.25%. These levels are well short of the +10% required to power a bull market.

The percentage of stocks above the 200-day EMA also remains anemic. Even after a 28% surge in the S&P 500, less than 30% of stocks are above their 200-day EMA. The numbers are even worse for the S&P MidCap 400 (16%) and S&P SmallCap 600 (13.17%). These are not bull market numbers.

Staples Surpass Industrials

There were some changes in the Sector Breadth Model and some shifts in the sector rankings. The Communication Services SPDR (10.73%) is now the third largest sector in the S&P 500 and the Consumer Staples SPDR (7.87%) is now the sixth largest. The Industrials SPDR (7.74%) slipped a notch and now weighs less than Consumer Staples. The Technology SPDR increased in size from 25.01% to 25.77% over the past week.

The shifting weights show that the S&P 500 is a closet momentum index. As the price of the sector rises, its weight increases and it becomes more of a driver. Conversely, the weakest sectors decline in weight and become less of an influence on the index.

Healthcare Sector Turns Net Bullish

There were four new bullish signals this week and no new bearish signals. The Healthcare SPDR (XLV) flipped from bearish to bullish and now joins the Real Estate SPDR (XLRE) as the other “net bullish” sector. Healthcare is the second largest sector and second most influential. XLV got a lift from the Biotech ETF (IBB), which hit a new high on Friday. Biotechs account for just 15% of XLV and not one biotech stock is in the top ten. ABBV is number 11 at 3.29%.  

Online Services Lead Communication Services

We also saw High-Low Percent for the Communication Services sector exceed +10%. This sector only has  22 stocks so it takes just three new highs to surpass the 10% threshold. New highs include ATVI and EA (online gaming) and NFLX (streaming). Of the other 19 stocks, only four are above their 200-day SMAs: TTWO, TMUS, GOOGL and CHRT

Sector Breadth Model Adds Some Green

With four new bullish signals, 10 of 33 signals are bullish. This means 23 signals are still bearish and the model remains decisively bearish. Five of the bullish signals are in the four smallest sectors, two are in Healthcare and one is in Consumer Staples. This is not exactly where we want to see the signals. A bull market needs bullish signals in the Technology, Consumer Discretionary and Industrials sectors.

Ranking by Percent Above 50-day EMA

The percentage of stocks above the 200-day EMA is a long-term measure for trend breadth and the percentage of stocks above the 50-day EMA is a medium-term measure. The table below shows the four big indexes and the 11 sectors ranked by percent above 50-day EMA. There are clearly some strong pockets in the stock market (Healthcare, Staples, Technology, Utilities), but these are offset by the weak pockets (Industrials, Consumer Discretionary, Finance). Large-cap techs and healthcare are holding up the broader market right now.

Fed Changes the Market Dynamics

The Fed is expanding its balance sheet to record levels and buying all kinds of credit instruments to prevent a collapse of the financial system. Hmm.. that does not sound good on the face of it. Nevertheless, the Fed has interrupted market forces for the time being.

The Fed balance sheet expanded yet again, but the weekly expansion slowed over the last two weeks. At $285 billion, however, the last injection was the fourth largest of the last five weeks and the fifth largest ever, in nominal terms. The Fed is clearly fighting the bear market with all its might.

The next chart shows the spread between AAA bonds and Treasuries, and BBB bonds and Treasuries. The Fed is buying these bonds and the spreads continue to fall, which is positive for stocks. AAA bonds are the highest rated investment grade bonds and BBB are the lowest rated investment grade bonds. BBB bonds are one step from falling to junk but the Fed has decided to prevent this from happening. The spreads are still well above pre-crisis levels, but are not rising anymore.

Junk bond spreads are also narrowing and this is net positive. However, they also remain well above pre-crisis levels. CCC or lower bonds represent the junk of the junk and these spreads remain very high (>16%).

Junk bond spreads are also narrowing and this is net positive. However, they also remain well above pre-crisis levels. CCC or lower bonds represent the junk of the junk and these spreads remain very high (>16%).

Thanks for tuning in an enjoy your weekend!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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