Market Timing Models – Three Bullish Factors Align as we Head into an Eventful Year-End

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Stocks took a hit early this week, but quickly rebounded as bigger bullish forces came into play. Today we will review these bullish forces by starting with the long-term picture for the S&P 500. I will then analyze the short-term uptrend, which survived its first test this week. Elsewhere, mid-caps and small-caps are doing their part with big breakouts on the weekly charts, while the index and sector breadth models remain firmly bullish. We will finish with another expanding week for the Fed balance sheet and highlight some events that could affect the market before year-end.

Ascending Triangle and New Highs Dominate

The weekly chart for the S&P 500 SPDR (SPY) remains unequivocally bullish with the Ascending Triangle breakout and fresh new highs six weeks ago. This Ascending Triangle extended for 13 weeks and the current advance is nine weeks old, and we have yet to see a meaningful pullback. Price is above the rising 40-week SMA and the PPO(4,40,0) has been positive for 43 weeks. Yes, Virginia, stocks do trend.

Two of the three indicators turned bearish on Tuesday, but rebounded immediately on Wednesday. The 1-day Rate-of-Change never dipped below -1% and this means the daily declines were NOT extraordinary. They were just run of the mill pullbacks after an extended advance. We need to see an “outsized” decline to signal a potential shift in trend. ATR(2) exceeded 30 and S&P 500 %Above 20-day EMA (!GT20SPX) dipped below 50% on Tuesday, but both moved back into bull mode on Wednesday.

I still think the bulls control the short-term uptrend in the S&P 500. This creates a bullish tailwind for equity-related ETFs and stocks.

Major Breakouts in IWM and MDY

There are major breakouts on the weekly charts for the Russell 2000 ETF (IWM) and S&P MidCap 400 SPDR (MDY). The first chart shows IWM surging for two months and then edging lower for six to eight months. IWM broke out of its falling channel in November and followed through with a break above the resistance zone last week. This is a 52-week high. More importantly, the price structure looks bullish with a two steps forward, one step backward and breakout sequence at work.

The indicator window shows RSI(14) moving from a bull range (40 to 80) to a bear range (20 to 60). RSI typically ranges from 40 to 80 during uptrends and 20 to 60 during downtrends. RSI exceeded 60 for the first time since September 2018 and this means upside momentum is the strongest in over a year. This is also a bullish development that confirms the breakout on the price chart. The next chart shows MDY with an Ascending Triangle breakout five weeks ago and RSI moving into its bull range four weeks ago.

At this point, we have large-caps (SPY), mid-caps (MDY) and small-caps (IWM) breaking out and hitting new highs. The tape is clearly bullish and will remain so until proven otherwise.

Index Breadth Model Remains Bullish

There is no change in the Index Breadth Model. The model has been net bullish since September 5th when 5 of 9 indicators were on active bullish signals. Currently, eight of nine indicators are on active bullish signals. The S&P SmallCap 600 High-Low% ($SMLHLP) is the only one with an active bearish signal. Even though new highs are dragging, the High-Low Lines are all rising and the %Above 200-day EMA indicators remain strong (!GT200SML = 60.8%, !GT200MID = 67.8% and !GT200SPX = 75.8%).

Sector Breadth Model Remains Firmly Bullish

There is no change in the Sector Breadth Model with 10 of 11 sectors net bullish. Energy is the only sector with bearish signals and XLE is the only sector SPDR below its 200-day SMA. Energy only accounts for 4.26% of the S&P 500 so its effect is minimal. More importantly, the big two remain very strong (Technology and Healthcare). Notice that these two have been net bullish since February 1st. Finance, Consumer Discretionary and Industrials joined by early September and the rest is history.

Fed Assets Continue to Increase

Fed assets expanded the last two weeks and the pace remains strong. The top window shows total Fed assets turning up sharply in September and continuing to rise. The System Open Market Account (SOMA), which is the largest part of the balance sheet, also increased for the seventh straight week. Overall, total Fed assets and SOMA increased 11 of the last 12 weeks. The Fed is clearly providing liquidity to the financial markets and this is net positive for stocks. Don’t fight the Fed!

Choosy about News Flow

I am very choosy when it comes to news flow and the analysts I follow. Less is definitely more because there is so much noise out there. Cutting down on noise means finding a feed that you can filter and twitter is great for this. You only need to follow people that truly add value. Even if you are following people for professional reasons, you can mute them from your feed if their analysis is not adding value to your process.

Two items came across my Twitter feed recently. First, Ryan Detrick, CMT, of LPL Financial (@ryandetrick) tweeted a seasonality chart for the month of December. The S&P 500 tends to dip into mid December and then rally into year-end. Of course, the great exception is December 2018, which we would all like to forget. Despite bullish seasonal patterns into year-end, I still think we need to watch the price charts first and put these seasonal patterns a distant second.

The second comes from @Jesse_Livermore, an anonymous tweeter who was interviewed by Patrick O’Shaughnessy of InvestorFieldGuide.com, which is an excellent podcast. “Livermore” retweeted Joe Weisenthal (@TheStalwart) and his interview with David Woo of BAML. Woo made three fundamental predictions for the next three weeks.

  • Phase one of a trade deal with China will happen before 15-Dec.
  • Boris Johnson will win and Brexit will happen.
  • Pelosi will ratify USMCA before year-end.

The tariff battle with China has been going on for a year and the S&P 500 is trading near all time highs. This battle has not affected the long-term trend, but tariff issues have certainly been blamed for short-term volatility. While I do not want to handicap the odds of a deal, stocks would likely explode higher at any hint of a deal. Bonds and gold would likely suffer. Of course, the opposite could happen should negotiations deteriorate. For what it’s worth, I am so bad with news flow that I had to google USMCA. Price, price, price!

Bottom Line: Bull Market Environment

The evidence is clearly stacked in favor of the bulls as we head into year-end and the next two weeks could be quite eventful. While I would not expect an event big enough to reverse the long-term uptrend, we could see some events big enough to juice the advance. In addition, the odds favor bullish resolutions when the bigger trend is up because the market is a forward looking beast. Yes, a beast!

The tape is clearly bullish with strength in large-caps, mid-caps and small-caps. Even though new highs are lagging, plenty of stocks are above their 200-day EMAs and in uptrends. Strength is broad-based in the S&P 500 with the S&P 500 EW ETF and six of the nine equal-weight sector ETFs hitting new highs recently. In the small-cap universe, the Industrials (PSCI), Technology (PSCT), Finance (PSCF) and Healthcare (PSCH) sectors hit new highs in November.

Seasonal patterns are bullish and we can also add an accommodative Fed to the mix. Thus, we have broad market strength, an expanding Fed balance sheet, bullish seasonal patterns and the potential for some bullish events. At the very least, this bullish mix means the dips could be very short as buyers step in at the first opportunity.  

Thanks for tuning in and Happy Friday!

-Arthur Hill, CMT
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