State of the Stock Market – Large-caps Continue the Heavy Lifting

The S&P 500 SPDR (SPY) has gone nowhere since July, and that’s ok. Consolidations, corrections and pullbacks are all part of the process when it comes to uptrends. As the chart below shows, SPY is knocking on the prior highs and very close to a breakout. Normally, I would not view a higher high as a “breakout” because higher highs are expected when the trend is up, and it is. However, a clear consolidation pattern is taking shape and a move above resistance would trigger a pattern breakout.

As the chart above shows, SPY is above the rising 40-week SMA and the PPO(4,40,0) is positive. The ETF encountered some overhead supply in the 302-303 area in July and September. Despite some resistance, the October low was above the August low as demand took over before prices could reach the October low (a higher low). A break above the July-Sept high would signal a continuation higher and target a move to the 322 area. The height of the pattern (302-282=20) is added to the breakout zone for a target.

Take patterns, targets and failed breakouts with a pinch bucket of salt.

Visually appealing patterns that we have seen in all the books on technical analysis don’t always work out as the theory would suggest. What a surprise! The pattern and target are not the most important aspects on this chart. The uptrend is the most important aspect and we should expect a new high as long as this uptrend remains in play. In addition, I would not fret if SPY moves to 305 and then back to 298. You will then start to hear the “”failed breakout” chorus beating the worry drums. Again, a pullback after a new high is not a big deal as long as the bullish thesis remains valid.  

Programming Note: Videos will start next week.

Three Big Sectors with Ascending Triangles

The next chart shows the five offensive sectors with Ascending Triangles working in the Technology SPDR (XLK), Consumer Discretionary SPDR (XLY) and Finance SPDR (XLF). Note that these patterns are subjective and dependent on how you draw the upper line. Nevertheless, there is no arguing the upward sloping lower line because all three formed higher lows from August to October. The Industrials SPDR (XLI) sports a zigzag uptrend since April. The Comm Services SPDR (XLC) is perhaps the least strong of the five because it tested its August low and remains in a consolidation.

Resistance Magnets Got to Work

Short-term, SPY is in the midst of an oversold bounce or short-term uptrend. As noted earlier this month, the ETF became oversold as three indicators moved below 20 on October 2nd. These indicators turned back up on October 3rd and 4th, and SPY is up 4.27% over the last 16 trading days (16-day ROC). At this point, there are no signs of weakness in the short-term uptrend as prices continued working their way higher the last seven days. The magnets at 302 are pulling prices higher and I think we could see a new high sooner rather than later.

I am not going to mark support for this 16-day upswing because there is really nothing to do should SPY turn down. Why? Because pullbacks and short-term oversold conditions are our friends when the bigger trend is up. I would not look for all three indicators to become oversold again. Instead, I would become interested in a bounce possibility if RSI(5) dips below 20.

Uptrends versus New Highs

The S&P 500 is within 2% of an all time high, but the number of 52-week highs continues to underwhelm. So far this week, new highs reached 47 for the S&P 500 and S&P 500 High-Low% ($SPXHLP) has not exceeded +10% since early September. S&P 400 MidCap High-Low% ($MIDHLP) remains on an active bearish signal since mid August, while S&P 600 SmallCap High-Low% ($SMLHLP) remains on an active bearish signal since October 2018.

One indicator does not dictate my broad market stance. Instead, I employ a weight of the evidence approach and the bulk of the evidence is still bullish for the S&P 500 and the market as a whole. Note that 71% of stocks in the S&P 500 are above their 200-day EMAs, while 62.5% of the S&P 400 MidCap Index and 55% of the S&P 600 SmallCap Index are above their 200-day EMAs. Even though this indicator whipsawed for mid-caps and small-caps, it has remained bullish for the large-caps since early February.

Overall, the index breadth model remains mixed and net bullish. All three indicators are bullish for the S&P 500, which is the most important index of the three (IMHO). $SML and $MID have been wishy washy the last few months and their indicators are split (three bullish and three bearish). All told, six of nine are bullish and this makes the market net bullish.

Index Breadth Model: Mixed and Bullish

Overall, the index breadth model remains mixed and net bullish. All three indicators are bullish for the S&P 500, which is the most important index of the three (IMHO). $SML and $MID have been wishy washy the last few months and their indicators are split (three bullish and three bearish). All told, six of nine are bullish and this makes the market net bullish.

Sector Breadth Model: Firmly Bullish

The Sector Breadth Model improved with three new bullish signals and one sector flipped from net bearish to net bullish. XLC %Above 200-day EMA ($GT200XLC) exceeded 60% this week to reverse its prior bearish signal. We also saw the 10-day EMAs of XLI AD Percent ($XLIADP) and XLE AD Percent ($XLEADP) moving above +30% for bullish breadth thrusts. The signal in XLI is encouraging because this is a key sector. The signal in XLE is not a big deal because the other two indicators remain on bearish signals.

An Unwieldy Sector

Numbers Note: The Comm Services SPDR (XLC) has 27 holdings, but four of these holdings are listed twice because of different share classes (GOOG/GOOGL, FOXA/FOX, NWSA/NWS, DISCK/DISCA). These share classes also explain why the S&P 500 has 505 stocks, not 500. XLC has only 23 stocks and is one of the smaller sectors in terms of stock count. Note that XLV, XLI, XLY, XLF and XLK have more than 60 stocks each. These are the biggest sectors by market cap and by number of holdings.

Frankly, I wish the sector re-alignment in June 2018 never happened. This is when stocks were pulled from the Consumer Discretionary SPDR and Technology SPDR to create the Communications Services SPDR. As you can see from the chart above, XLC triggers lots of signals because it does not take much to move breadth indicators when there are just 23 stocks. The Materials SPDR is another unwieldy sector with 28 stocks.

SOMA Surges

The Fed’s balance sheet continues to expand as Total Assets edged higher this week and SOMA increased the most since April 2015. I am not going to get into the nuances of Fed action except to suggest that it is net positive for stocks. You can read more about the Fed’s balance sheet at the St Louis Fed website and SOMA at the NY Fed website.

Bottom Line

The broader market is still mixed, but the bullish evidence outweighs the bearish evidence. At the very least, it does not make sense to be negative when the Fed balance sheet is expanding and the tape is bullish. Yep, don’t fight the Fed or the tape.

Throw in some bullish seasonal patterns in November and bullish continuation patterns on several price charts and we have a recipe for further gains in the S&P 500 and Nasdaq 100.

I did not include small-caps because the Russell 2000 has been stuck in a rut for at least six months and is a serious laggard. Should the Russell 2000 breakout along with the S&P 500 and Nasdaq 100, it would signal that the bull market is broadening. Look for confirmation with bullish signals in the Index Breadth Model.

Stock picking remains a challenge because the broader market is mixed. There are three active bearish signals in the Index Breadth Model, 52-week highs are lacking, SPY and QQQ are in trading ranges the last three months, and MDY and IWM have gone nowhere the last six months. It is also earnings season. This is not a broad uptrend that lifts all boats so stock picking requires extra vigilance.  

ETF Chart Notes

The ETF ChartBook was posted in yesterday’s commentary, ETF Ranking and Grouping. I went through these charts again today and here are some notes:

Watch 120 for a short-term breakout in MTUM.

XLP broke falling flag resistance as top component PG surged to a new high.

XLK surged from October 3 to 15 and formed a small bull flag the last 7 days.

ITA is getting an oversold bounce as RSI(10) moved above 30.

GLD remains in a falling flag and needs to close above 142 for a breakout.

UUP got an oversold bounce as RSI(10) moved above 30 this week.

Tech-related ETFs perked up on Wed-Thu with big gains in SKYY, HACK and IGV.

Outside of SOXX, IPAY is the only one above its 200-day SMA.

Tech-related ETFs: QQQ, XLK, RYT, SKYY, HACK, IGV, FDN, SOXX, IPAY, FINX

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Have a great weekend!

-Arthur Hill, CMT
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