My current focus remains on the medium-term up trends, which began with the surge in late March. The bulls are still in control of these medium-term trends and we saw several short-term breakouts in July. Some breakouts were strong as price exceeded the June high (SPY), while some were feeble as price remains well below the June high (RSP). Strong or feeble, the breakouts are still holding and have yet to be proven otherwise.
Today I will review the medium-term indicators that hold the key to the medium-term uptrends and key support levels to watch in SPY and RSP. These levels are quite important because support breaks as we head into a seasonally weak period would be quite bearish. See last week’s commentary and video for analysis of the seasonal patterns.
The S&P 500 breadth model turned bullish this week, but it comes at a time when QQQ is looking frothy and vulnerable to at least a corrective period. Keep in mind that some 80 stocks in QQQ are also in SPY and these stocks account for 40% of SPY. The mid-cap and small-cap breadth models remain net bearish as their respective ETFs battle their 200-day SMAs.
Medium-term Indicators Remain Net Bullish
The medium-term uptrend still holds the key for me going forward and all three indicators are in bull mode. The first chart shows the High-Low Lines extending their advances as new highs actually expanded this week, especially in the S&P 500. All four are above their 10-day EMAs and supportive of the medium-term uptrend.
The Bullish Percent Indexes have been net bullish since late March and all three moved higher over the last few weeks. $SPXBPI and $OEXBPI are above 75% and $NDXBPI is above 80%. Far more stocks have P&F Double Top Breakouts (higher highs) working than Double Bottom Breakdowns (lower lows) and this supports the medium-term uptrend.
20-day High-Low Percent turned bullish on July 13th with a move above +10% and improved over the last few weeks, finishing at +36.8% on Thursday. The indicator, however, is well below the levels seen in early-mid June, when it surpassed 60% twice. Thus, it would appear that fewer stocks are participating in the July advance. This is not bearish just yet though. A move below -10% is needed to trigger this indicator bearish.
As a group, all three indicators are bullish and supportive of the medium-term uptrend. The group would turn net bearish when two of three trigger bearish signals.
Large-Cap SPY versus Equal-Weight RSP
The S&P 500 SPDR (SPY) and the S&P 500 EW ETF (RSP) continue to capture the market divide and medium-term uptrends. SPY represents large-caps and large-cap techs, which are outperforming. RSP represents the average stock in the index, which is underperforming. Both broke out of consolidation patterns in early July and these breakouts are holding (bullish until proven otherwise). In addition to the medium-term indicators above, I will be watching these two for the next directional clues.
SPY extends medium-term uptrend with short-term breakout. The first chart shows SPY holding its 200-day in June and then exceeding its June high this week. The ETF broke out near 310 and this is the first area to watch for a failed breakout. Medium-term, the June lows and 200-day mark key support. A break here would reverse the medium-term uptrend.
RSP is clearly not as strong, but also has a short-term breakout and medium-term uptrend working. RSP broke the 200-day in June and remains well below its June high here in July. Despite improving breadth this week, the breakout in RSP is looking fragile. The 15-July gap and Bollinger Band breakout mark the first area to watch. A close below 103 would negate the breakout and put RSP back below the 200-day. The June lows mark key support and a break here would reverse the medium-term uptrend.
S&P 500 Breadth Model Turns Bullish
The S&P 500 breadth model turned net bullish on Monday (three bullish signals and two bearish signals). S&P 500 High-Low% tipped the balance as the indicator exceeded +10% for the first time since late February. This new signal joins active bullish signals from the 10-day EMA of Advance-Decline Percent and the %Above 100-day SMA. The %Above 150-day SMA and %Above 200-day SMA remain with bearish signals. The green and red ovals on the chart below show the active indicator signals.
The next chart shows SPY above its rising 200-day SMA, the percentage difference between the 5 and 200 day SMAs turning positive in late May and the breadth model moving from -1 to +1 this week. This is a bullish configuration for the S&P 500.
You can learn more about the breadth model and its historical performance in this article and video (here).
New Bullish Signals in the Sector Breadth Model
There were four new bullish signals in the sector breadth model and the model as a whole improved. XLY High-Low% ($XLYHLP) exceeded +10% and XLY %Above 200-day EMA (!GT200XLY) exceeded 60% to turn Consumer Discretionary net bullish. Retail and housing get credit for the improvement in breadth. XLI High-Low% ($XLIHLP) also triggered a bullish signal with a move above +10%. Expanding new highs in Consumer Discretionary, Finance and Healthcare get credit for the bullish signal in S&P 500 High-Low% ($SPXHLP).
All told, seven of eleven sectors are net bullish. Five of the six biggest sectors are net bullish and Finance is the big laggard. The bearish signals are concentrated in Finance, Utilities, REITs and Energy.
The weight of the evidence is bullish for the S&P 500. SPY is above its 200-day, the 5-day SMA is above the 200-day, the S&P 500 breadth model is bullish and the Sector Breadth model is bullish. What more could you want? How about a rest in QQQ and some confirmation from mid-caps and small-caps!
QQQ Remains Bullish and Frothy
The next chart shows QQQ, the percentage difference between the 5 and 200 day SMAs and the breadth model signals. The weight of the evidence is clearly bullish, but QQQ is extended, very extended. The 5-day SMA has been over 20% above the 200-day SMA for two weeks (yellow oval). This is the most since 2009 (July to November). At the very least, QQQ is ripe for a corrective period and I am marking first support in the 240 area (broken resistance and the June troughs).
(Revised) Strange Happenings in the Nasdaq and QQQ
QQQ is partying like it is 1999. Yes, I am old enough to remember this period! The chart below shows weekly prices for QQQ, the 40-week EMA and the PPO(1,40,1), which shows the percentage difference between the 1-week EMA and 40-week EMA. Currently, QQQ over 20% above its 40-week EMA and this is the most since early 2000. This is not outright bearish, but it does suggests that QQQ is ripe for a corrective period. **Note that I revised this paragraph and chart on Saturday. Friday’s chart showed the absolute Rate of Change, not percentage ROC.
@SoberLook tweeted out a chart showing Nasdaq volume relative to NYSE volume. I re-created the chart by showing the 20-week SMA of the $NATV:$NYTV ratio. The smoothed Nasdaq/NYSE volume ratio surged from around 2.3 in mid December to 3.2 here in July 2020. The steepness of the surge suggest that we have some speculative fever at work. The bottom windows show the 52-week SMA of Nasdaq volume ($NATV) at 3196 and the 52-week SMA of NYSE volume at 1308, which is a ratio of 2.44.
And finally, the next chart shows QQQ relative to the S&P 500 EW ETF (RSP) since 2007. QQQ is up around 500% since January 2007. Before getting all excited, note that timing is everything. QQQ debuted on 10-March-1999 and is up 153% since inception. Performance numbers often depend on the starting date. In any case, QQQ is killing RSP performance-wise and outperformance went vertical in 2020. The 20-week Rate-of-Change of the price relative (QQQ:RSP ratio) surged above 30% twice in the last few months. QQQ is the place to be, but getting frothy by many measures.
QQQ is in the midst of a parabolic move higher and looking dangerous. However, picking a top during a parabolic advance is a fool’s errand. The 15 week Rate-of-Change exceeded 40% for the third time since 1999. After the December 1999 occurrence, QQQ continued another 25% higher from January to March 2000, and then crashed. The January 2002 occurrence marked the peak of a bear market rally.
Mid-caps and Small-caps Still Dragging
The AAA and BBB bond spreads fell to pre-crisis levels in late May and remain at these levels. This indicates that the corporate bond market is not stressed or the Fed has the bond market’s back. In other words, the Fed gave the bond market a healthy doze of Xanax. Whatever the reason, it is net positive to see these yield spreads holding near pre-crisis levels.
The weight of the evidence is clearly bearish for small-caps. The S&P SmallCap 600 SPDR (IJR) is below the falling 200-day, the 5-day SMA is below the 200-day and the breadth model is net bearish (-1). IJR met resistance at the falling 200-day and broken support zone in June. IJR fell back to the March trendline and bounced in July to establish support from the June-July lows (green zone). A break below support would reverse the medium-term uptrend.
Overall, it is still quite possible that the March-July advance in MDY and IJR is a bear market rally. Both met resistance near broken support and their 200-day SMAs. This is textbook stuff: a counter trend bounce returning to the prior support break and the 200-day. Both ETFs have short-term breakouts working, but should be watched closely. Failed breakouts and subsequent support breaks would reverse these counter-trend bounces.
Yield Spreads and Fed Balance Sheet
AAA and BBB bond spreads narrowed again this week and are below their pre-crisis highs, which were in early January 2019. This narrowing may be because of Fed buying. Regardless of the reasoning, narrow spreads indicate that credit markets are functioning normally.
Junk and CCC bond spreads also narrowed the last few weeks. Junk bond spreads are back at pre-crisis levels and CCC spreads are just above pre-crisis levels. This also shows that the low end of the bond market is functioning normally.
The Fed balance sheet expanded a little this week ($6 billion). This is basically a rounding error on a $6.9 trillion balance sheet.
