The market, as measured by the S&P 500 SPDR, is at make or break level. Analysts love to talk about key levels and it seems that there is a new “key” level every week if you watch the wrong news outlets. Well, the S&P 500 is at a key level that we should watch closely. The long-term trend remains down and the breadth models are bearish, but the biggest sectors are in uptrends and the laggards caught a bid this week. In addition, the short-term trend in SPY is up with this week’s surge and breakouts. This short-term uptrend is now challenging the 200-day SMA and this really is a make or break level.
Studying the 2019 Plunge and Recovery
Let’s look at the 2019 plunge and recovery to see if we can apply any lessons to the current situation. The green line on the chart below shows when the Index Breadth Model turned bullish (February 5th, 2019). SPY was just below its 40-week SMA and the PPO(4,40,0) was slightly negative. SPY is currently in a similar situation, except the Index Breadth Model is not bullish. SPY is just below the 40-week SMA and the PPO is slightly negative.
The 2019 plunge and recovery looks tame relative to the 2020 crash and rebound. Nevertheless, we can see that SPY is near a make or break point. Another big up week could push SPY above the 40-week SMA and an improvement in breadth could tilt the Index Breadth Model bullish. A break above the 40-week SMA (200-day SMA) could trigger more buying pressure and carry the market higher. We could then see a zigzag type advance unfold similar to the May to September period last year.
A Narrow Range Week shows Indecision
At this point, however, the Index Breadth Model remains bearish and SPY remains below the 40-week SMA. Thus, the picture is still long-term bearish. The candlesticks show a volatile indecision the prior four weeks. There were two dips to the 270-275 area and a spike above 290. In contrast, this week’s candlestick is shaping up to be small and indecisive. In fact, this week’s range is the smallest since the week ending February 21st (blue ovals). Cue twilight zone music.
The chart above shows a custom indicator created in Optuma, that “other” charting program. It is the high-low range divided by the midpoint of the high-low range. Dividing by the midpoint normalizes the indicator and shows it as a percentage. This week’s range is around 2% and the last two percent readings occurred in late February. This just signals indecision after an advance and indecision can sometimes lead to a reversal.
Flag Breakout and Gap are Holding
Indecision is an interesting phenomenon in the markets because it provides an argument for both bulls and bears. After an advance, such as the one off the March lows, the bulls view indecision as the pause that refreshes. For example, a flat flag shows indecision and is a bullish continuation pattern. The bears, however, view indecision as a sign that the advance is stalling and a reversal is in the offing.
The resolution of this indecisive phase will dictate the directional bias for the coming weeks. An upside resolution, which we are seeing now with the flag breakout, would be bullish and could push SPY above the coveted 40-week SMA. A downside resolution at this stage would mean a failure below the 40-week SMA and a continuation of the prior decline. This is why we really are at a make or break level.
The chart above shows 20-day High-Low Percent flipping back to bullish on Monday’s close. SPY recorded a 20-day high, but only around 20% of stocks in the S&P 500 recorded 20-day highs. Even though this is well below the April levels, there are more 20-day highs than 20-day lows and this is enough to keep the bulls afloat. A move back below -10% would trigger a bearish signal, and hopefully not another whipsaw.
Few Leaders and Lots of Downtrends
There are no new signals on the Index Breadth Model. The six long-term indicators remain with bearish signals, while the three breadth thrust indicators remain with bullish signals. The breadth thrusts in April triggered with strong upside participation, but follow through has been limited because High-Low Percent is barely positive and the percentage of stocks above the 200-day EMA has yet to clear 40%. Leadership is still relatively scarce (new highs) and there are still a lot of downtrends out there.
The chart below shows the three breadth thrust indicators: 10-day EMAs of Advance-Decline Percent. These indicators zigzagged higher from mid March to late April and peaked on April 29th. They have since zigzagged lower the last three weeks, but have yet to reverse their bullish signals from April. A move below -30% is needed to trigger a bearish breadth thrust.
The S&P 500 moved above its April 29th high this week, but the High-Low Percent indicators barely budged and remained subdued. A move above +10% is needed to trigger a bullish signal here and we have yet to see even a move above 5%. The low number of new highs reflects limited leadership in the market. Leadership is confined to Technology and Healthcare.
The long-term trend participation indicators (%Above 200-day EMA) turned bearish at the end of February and all three are currently below 30%. Less than 20% of small-caps and mid-caps are above their 200-day EMAs. These numbers are NOT indicative of a bull market.
Click here for an article and video [1] explaining the indicators, signals and methodology used in the Index Breadth Model. This article also includes the signals of the last five years.
High-Low Lines are Rising
Even though the High-Low Percent numbers are uninspiring, the High-Low Lines are rising ever so slightly. In fact, to see this rise you need a chart that extends back less than 2 months. The chart below shows the S&P 500 and S&P MidCap 400 High-Low Lines rising since April 17th and 23rd, respectively. A rising High-Low Line simply means new highs are outpacing new lows, even if the total number of new highs is low. These rising High-Low Lines jibe with the choppy rise in the S&P 500. The bulls have a short-term edge as long as these lines rise. Downturns and crosses below the 10-day EMA would be negative.
OEX and NDX Bullish Percent Indexes Hold
I featured the S&P 500 Bullish Percent Index ($BPSPX) last week as it plunged below 40% for a bearish signal. The market promptly put me in my place on Monday with a gap and 3% surge. Funny how that works. NOT. Today I am showing the Bullish Percent Indexes for the S&P 100 and Nasdaq 100 as well. Large-caps are leading this chart and this is reflected in the Bullish Percent Indexes. Notice that the BPIs for the S&P 100 and Nasdaq 100 did not dip below 40% and held up better than the broader S&P 500. Furthermore, note that S&P 500 BPI is at its moment of truth (58.80). Further strength would put it above 60% for a bullish signal.
Sector Breadth Model is Unchanged
Despite a surge in stocks so far this week, there is no change to the Sector Breadth Model. Nine of eleven breadth thrust indicators are green (bullish signals), while eight High-Low Percent indicators are red (bearish) and eight %Above 200-day EMA indicators are bearish. Overall the three biggest sectors are net bullish and these three account for over 50% of the S&P 500 market cap. Consumer Discretionary, Industrials, and Finance are still net bearish. At best, we have a split market.
The Sector Breadth Model is technically mixed as the three biggest sectors battle the fourth, fifth and sixth biggest sectors. It is a 3-sector tag team battle for the ages. Will tech, healthcare and communication services prevail or will consumer discretionary, industrials and finance drag the bigger sectors down? I am betting on the latter at this point.
Yield Spreads and Fed Balance Sheet
Corporate bond spreads continue to narrow and this is positive for stocks because narrowing spreads reflect a stronger risk appetite in the credit markets. The first chart shows the AAA spread and the BBB spread falling rather sharply this week. The AAA spread is below 1% and back to pre-crisis levels. The BBB spread is still well above pre-crisis levels, but moving in the right direction (down/narrowing).
The High-Yield Bond ETF (HYG) broke out this week and this breakout is reflected in the narrowing yield spread. The junk bond spread fell to 7.16%, its lowest level since March 11th. It is still well above pre-crisis levels, but moving in the right direction. CCC bond spreads, which represent the junk of the junk, edged lower this week, but remain very elevated. This means the riskiest end of the market is still quite stressed.
And needless to say, the Fed balance sheet expanded another $103 billion this week and exceeded the $7 trillion mark. The expansion may have slowed in recent weeks, but it certainly did not stop and this money is finding its way into the financial markets (bonds and large-cap stocks).
