Today’s report will focus on the breadth models, the breadth indicators for the S&P 500 and the long-term trend for the S&P 500. All are in bull mode right now and the broad market environment is bullish. I am also updating the backtest for the Trend Breadth Model and then adding a twist by trading QQQ with signals from the S&P 500 Trend Breadth Model. We finish with the Sector Breadth Model and a sector that turned net bearish.
Thrust and Trend Models Remain Firmly Bullish
There were no new signals this week for the short-term breadth model, which I am referring to as the Thrust Breadth Model because this model looks for bullish and bearish thrusts in short-term indicators. %Above 50-day SMA triggers with a thrust above/below 85/15 percent, %Above 20-day SMA triggers with a thrust above/below 90/10 percent and the 10-day EMA of Advance-Decline Percent triggers with a thrust above/below +30/-30 percent. All nine short-term signals are bullish and all five short-term models are bullish.
There were no new signals in the long-term breadth model, which I am referring to as the Trend Breadth Model because it uses four longer-term indicators that are more oriented towards trend following. The signal details are shown just below the table. The High-Low Percent indicators for the S&P SmallCap 600 and S&P MidCap 400 are still dragging their feet and have yet to trigger bullish with crosses above +10%. Nevertheless, four of their indicators are on active bullish signals and both indexes are net bullish.
SPX Models and Indicators
The chart below shows the two models for the S&P 500 and all signals are bullish. The Trend Breadth Model has been bullish since July 20th and all five indicators are on active bullish signals right now. The Thrust Breadth Model has been bullish since April 29th and all three indicators are on active bullish signals. The lower window shows the percentage difference between the 5 and 200 day SMAs. The 5-day has been above the 200-day since May 29th.
The next chart shows the five indicators for the S&P 500 Trend Breadth Model. Over 80% of stocks are above their 150-day SMA, while over 70% of stocks are above their 200-day and 100-day SMAs. The green circles show the currently active signals. High-Low Percent may seem uninspiring, but it has managed to exceed +10% each of the last four months. Clearly, new highs are outpacing new lows and this makes the cup half full. Participation is strong as we saw the 10-day EMA of AD% move above +30% on October 8th and 12th. Bottom Line: the Trend Breadth Model is firmly bullish.
The next chart shows the three indicators for the S&P 500 Thrust Model. There are fewer stocks above their 50-day SMA (65.67%) than in May, June or July, but I would not read too much into because the surge off the September lows was strong. %Above 20-day SMA surged above 90% on October 12th and this shows broad participation during the bounce off the September low.
Signals and Historical Performance
The image below shows the signals when combining the Trend Breadth Model and the 5/200 day SMA cross for the S&P 500. The strategy turns buys SPY when the model is net positive AND the 5-day is above the 200-day. The strategy sells when the model turns net negative OR the 5-day crosses below the 200-day. There have been 21 signals (long-only) since January 2000: 14 winners and 7 losers. The Compound Annual Return (CAR) for trading SPY with dividends is 6.35% and the Maximum Drawdown (MDD) is 18.62%. CAR for buy & hold is 6.21%, but there were drawdowns of 55% (February 2009), 47% (January 2002) and 33% (March 2020).
The next table shows results when trading QQQ for the same signals. The Nasdaq 100 ETF, of course, has a higher beta than the SPY and offers more reward potential. But can we capture this reward and still control risk? Apparently yes. Trading QQQ returned 8.5% per year and the Maximum Drawdown was around 18%. Even though the Win Rate was lower (12 winners and 9 losers), the returns were better and the Maximum Drawdown was actually lower. It was still a bumpy ride because there were six drawdowns in the 15% area from 2005 to 2020 (one every few years).
I know what you are now thinking. How about trading QQQ with the Nasdaq 100 breadth model signals? Well, the Compound Annual Return was less (7.72%) and the Maximum Drawdown exceeded 30%. Note that I also tried trading IWM, MDY and IJR using S&P 500 breadth model signals. The Maximum Drawdowns ranged from 25 to 31 percent and Compound Annual Returns were in the 7 percent area. Thus, there is no added value trading small-caps or mid-caps. Trading QQQ with S&P 500 signals is the way to go for a little more octane.
Sector Model Remains Firmly Bullish
There is one new signal on the Sector Breadth Model and it comes from the second weakest sector, Real Estate. Overall, the model is firmly bullish with nine of eleven sectors net bullish and the sum of the weighted signals above +88%. This supports the bull market environment. The six biggest sectors are net bullish and the only bearish signal among them is the Finance High-Low% ($XLFHLP). XLRE turned net bearish as the 10-day EMA of AD% plunged below -30% for a bearish breadth thrust. XLRE also sports the second weakest price chart because it has gone nowhere since April.