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Market Timing Models – Smalls, Mids and Equals Come to Life as Bull Market Broadens

Uptrends and new highs are bullish. Sorry, but there is no other interpretation. We can debate the degree of bullishness, we can debate overbought conditions and we can debate non-confirming indicators. However, everything, and I do mean everything, is secondary to price action.

Consider this: The S&P 500, Nasdaq 100, S&P 400 MidCap and Russell 2000 recorded new highs this week. These indexes account for large-caps, large-cap techs, mid-caps and small-caps. Even though the Russell 2000 is not at an all-time high, it is participating with a 52-week high and long-term uptrend. One year is plenty long enough for me.

Furthermore, we are seeing new highs in the S&P 500 Equal-weight Index and new highs in six of the ten equal-weight sector ETFs. Besides Healthcare and Consumer Staples, we are seeing new highs in Technology, Consumer Discretionary, Finance and Industrials. The latter four are the offensive sectors and new highs in these equal-weight sectors reflect broad strength in the sectors we want to see leading.

Also keep in mind that SPY and QQQ hit new all time highs in November and are leading on the price charts. MDY also hit a new 52-week high, but remains short of its September 2018 high (~3.5%). Drilling down into the equal-weight universe, we can see that the S&P 500 EW ETF (RSP), EW Industrials ETF (RGI), EW Technology ETF (RYT), EW Healthcare ETF (RYH), EW Finance ETF (RYF) and EW Consumer Staples ETF (RHS) hit new highs in November. These new highs show broad strength, or at least broad enough.

SPY Leads with an All-Time High

SPY moved above 315 for the first time ever and notched another all-time high. The trend for SPY has been up since early February, which is when the 4-week EMA moved above the 40-week EMA. The PPO(4,40,0) captures this EMA cross and acts as a proxy for the 20-day/200-day cross, which I used on the daily chart for SPY. The breadth indicators for the S&P 500 have been net bullish since early February. Thus, the Ascending Triangle from July to October was a consolidation within an existing uptrend and the late October breakout simply continued this uptrend.

Looking back to June 2018, we can see a 15-week Symmetrical Triangle consolidation and breakout. Four weeks after the breakout, SPY pulled back with a three-week decline and formed a falling flag of sorts. This advance continued with the flag breakout and new highs ensued. We will get a pullback at some point, but picking that point is a challenge because the long-term and short-term trends are up, and strong.

We clearly got the perfect bull storm in October-November. Yeah yeah, I know, hindsight is 20/20. SPY was already in an uptrend and digested its gains with a consolidation from late July to late September. Seasonal patterns turned bullish in October (six-month cycle) and the Fed balance sheet started to expand in October. Sentiment was also quite bearish in September and I would guess that many fund managers were underweight equities. As we will see below, there were also some bullish technical signals in September-October and this advance did not go unnoticed.

Low Vol Advance Continues

I am using three indicators to monitor the short-term uptrend in the S&P 500: the 1-day Rate-of-Change, the 2-day Average True Range and S&P 500 %Above 20-day EMA (!GT20SPX). The 1-day ROC has ranged between -1% and +1% since mid-October and the 2-day ATR has been below 30. These two reflect low volatility and support the short-term uptrend. A move below -1% in ROC and above 30 in ATR would show an uptick in volatility and this could lead to a pullback. Also, watch for the percentage of stocks above the 20-day EMA to break below 50%. Expect the short-term uptrend to extend even more until we get some signals suggesting otherwise.

I focus mostly on the S&P 500 because the broader market is likely to correct if the S&P 500 pulls back. Moreover, small-caps and mid-caps have a greater chance extending their flag breakouts as long as the S&P 500 remains short-term bullish.

Index Breadth Model Remains Firmly Bullish

There is no change in the index breadth model, which remains firmly bullish with 8 of 9 indicators on active bullish signals. Note that this model was ahead of the perfect bull storm because it turned net bullish on September 5th with 5 of 9 indicators on active bullish signals. S&P 400 %Above 200-day EMA (!GT200MID) then turned bullish on 11-Sept (6 of 9), S&P 600 %Above 200-day EMA (!GT200SML) turned bullish on 29-Oct (7 of 9) and S&P 400 MidCap High-Low% ($MIDHLP) turned bullish on 6-Nov (8 of 9). S&P 600 SmallCap High-Low% ($SMLHLP) remains the lone hold out now.

New Highs Underwhelm, but Beat New Lows

The next chart shows new highs and new lows for the S&P 500, S&P Mid-cap 400 and S&P Small-cap 600. New highs may seem underwhelming, but new lows are even more underwhelming. The differential is what really counts. We saw an uptick in new lows in August, but this did not last long as new highs regained the edge in September. A bull market does not need new highs to exceed 100 and overwhelm. A bull market simply needs more new highs than new lows, and this is what we have.

Sector Breadth Model Overwhelmingly Bullish

Even though new highs are not overwhelming, the Sector Breadth Model shows 10 of 11 sectors net bullish and 30 of 33 indicators on active bullish signals. Energy is the only sector that is net bearish and it has been bearish since May 1st. Looking at the “Net Bullish or Net Bearish” column we can see the improvements starting in early September when Finance and Consumer Discretionary turned net bullish (green arrows). Industrials turned net bullish in late August, while Communication Services turned net bullish on October 22nd. Thus, by October 22nd. The six biggest sectors in the S&P 500 were net bullish and supportive of a bull market.

Key High-Low Lines Rising

The next chart shows the High-Low Lines for the six biggest sectors in the S&P 500. Together, these six sectors account for 79.61% of the index weighting. In fact, the top three sectors, Technology, Healthcare and Finance, account for 50% of the S&P 500. The Technology, Finance and Industrials High-Low Lines have been rising (above their 20-day EMAs) since February. The Consumer Discretionary High-Low Line turned up in early September, while the Healthcare and Communication Services High-Low Lines turned up in October. All six High-Low Lines are currently rising and supporting the bull market.

No New Info on Fed Balance Sheet

The Fed updates their balance sheet info on Thursdays and this past Thursday was a holiday. They will probably provide an update on Friday. For now, all we need to know is the trend. The Fed balance sheet is expanding and the System Open Market Account (SOMA) is increasing. This means the Fed is buying assets and providing liquidity to the system, which is positive for stocks. Yes, big brother has your back! I do not know how long this will last and we should keep in mind that this is just one piece of evidence. Moreover, it does not carry above average weight. Price action is always first. Everything else comes second. Links: Fed balance sheet [1] and System Open Market Account (SOMA) [2]

Bottom Line: Bull Market Environment

The bull market environment continues to broaden with the small-cap and mid-cap indexes hitting 52-week highs this week and several equal-weight sector ETFs joining the new high parade. Mid-caps are stronger than small-caps because the S&P MidCap 400 is now within 1% of an all-time high, which was in late August 2018.

Even though the evidence is overwhelmingly bullish, keep in mind that the major index ETFs are up between 8 and 12 percent over the last eight weeks. Moreover, 17 of the 53 equity ETFs in the Core ETF List are up over 10% since early October. The biotech ETFs are up over 20%.

At this stage, I think we are in the monitoring phase of an advance, which is after the signal. We simply monitor price action until there is a change or there is another setup. The short-term breakouts triggered in early October, while bigger consolidation breakouts triggered in late October and early November. Most recently, we saw several flag breakouts this week.

We know that stocks and ETFs can become overbought and remain overbought in strong uptrends. Note that weekly RSI(14) for SPY hit 70 this week. At this stage, I am monitoring the short-term uptrend in the S&P 500 for clues on the broader market (see the chart with ROC and ATR). A short-term reversal in the S&P 500 could lead to a broader pullback. Guessing the length and duration of any pullback is also a challenge, especially with such a strong uptrend as we head into yearend.

Thanks for tuning in! Now get out and shop!