As with many things in life, we are usually better off focusing on the present when it comes to stock market analysis. Focus on what IS happening, as opposed to what MIGHT happen. This is a game of odds and the odds favor a continuation of current conditions, as opposed to a change. The trend, especially an uptrend, is more likely to continue than reverse. There will be plenty of concerns along the way, and the financial media will be more than on top of it, but trend is the single most important factor and the trends are clearly up for the major index ETFs.
Similarly, patterns within a bigger uptrend are more likely to resolve themselves to the upside. Flags, falling wedges, pennants, ascending triangles, triangles and flat consolidations are viewed as bullish continuation patterns when the bigger trend is up. In addition, pullbacks, short-term oversold conditions and corrections are viewed as opportunities, not threats. The key is to put the odds in our favor and trade in the direction of the bigger trend.
Just a heads up on the holiday scheduling. The stock exchanges will close early (1PM ET) on Christmas eve (Thursday) and be closed on Friday, Christmas day. I will publish on Tuesday and Wednesday next week.
The stock exchanges will be closed on Friday, January 1st. I will publish once, Wednesday December 30th, between Christmas and New Year.
Looking for more analysis? There is a lot of content with a longer shelf life available on the Premium page (here). This includes:
- A six part series on trading with the StochClose indicator
- My view on dividend adjustments
- RSI for Trend-Following and Momentum
- Testing the All Weather Portfolio
- Exit Strategies: Chandelier, Parabolic SAR and ATR Trailing Stop
Triangle Breakouts Hold in SPY and QQQ
SPY broke out with a strong open on Monday, November 9th (V-day), held this breakout and worked its way higher the last four weeks. Basically, we have a 53% advance in 22 weeks, an 11 week consolidation and a breakout that is six weeks old. The breakout is holding and that is pretty much all we need to know. The bears do not have a leg to stand on as long as the breakout holds. A move back below the breakout zone (350) would not be considered a bull trap or failed breakout (bearish). Instead, it would be considered part of the normal ebb and flow of market fluctuations. Moreover, a pullback within a bigger uptrend would set up the next opportunity.
The advance over the last six weeks is actually kind of boring. SPY surged 7.23% the week of the election and then added another 6.31% the last six weeks. SPY has been 15% above its rising 40-week SMA the last four weeks and this is a bit extended. Extended and overbought conditions are not outright bearish and they are certainly not sell signals. Stocks can become overextended and remain overextended in strong uptrends.
The next chart shows QQQ with similar characteristics. Notice that the ETF was 20% above its 40-week SMA on July 10th and the advance continued another seven weeks before a consolidation took hold. QQQ stalled for 12 weeks and broke out a week or two after SPY, but broke out all the same. The breakout is holding and QQQ is extending higher, and even taking the lead again. Although, QQQ never really lost the lead in my book.
IWM Goes 30 for 30
We are running out of superlatives to describe the moon shot in the Russell 2000 ETF (IWM). IWM extended its run with another big week and is now up 34% the last 12 weeks. The ETF is also 32.5% above its 40-week SMA, which is the most since trading began (2000). IWM was up some 47% in 10 weeks in early June and then corrected with a big outside reversal, which just marked a one week pullback, not a trend reversal.
The 30+ percent advance in 12 weeks is the third for IWM (since 2000). The first occurred in late May and early June 2009 as IWM surged off the March 2009 low. This rocket blastoff signaled the start of a big bull run, but note that IWM corrected with a five week pullback from June 8th to July 10th (2009). IWM was also up 30+ percent in 12 weeks in early June 2020 and then corrected for two to three weeks.
Breadth Models Remain Bullish
The SPX Trend Model remains firmly bullish with five of five indicators on bullish signals since early August. The 5-day SMA for SPY is also firmly above the 200-day SMA (since late May). The SPX Thrust Model is also firmly bullish with three of three indicators on bullish signals.
The Trend Breadth Models remain bullish for all five indexes.
The percent above moving average indicators reflect broad strength within the trend models. Over 85% of stocks are above the three trend model moving averages. The percentages below shows how many stocks in each index are above their 100, 150 and 200 day SMAs.
Over 85% of $SPX and $NDX stocks
- Over 90% of S&P 100 stocks
- Over 89% of S&P MidCap 400 stocks
- Over 90% of S&P SmallCap 600 stocks
We are also seeing new highs expand and remain healthy. The Nasdaq 100 is the leader by far, but we are also seeing expanded leadership in mid-caps the last few weeks.
- Nasdaq 100 High-Low Percent reached 17.5% on Thursday.
- S&P MidCap 400 High-Low Percent reached 14.5% this week.
- S&P SmallCap 600 High-Low% cleared 10% four times this month.
The chart below shows the Trend Model indicators for the S&P 500. Notice how %Above 100-day SMA moved above 75% in mid July and remained so until early September (blue shading). This indicator moved above 75% on November 9th and remains above this threshold. A move below 75% could signal a pullback or correction.
Four of the five Thrust Breadth Models remain bullish. The S&P 100 is the only model that is net bearish. I would not read too much into this because the index has just 100 stocks and the other four models are net bullish. Take the weight of the evidence.
The chart below shows the Thrust Model indicators for the S&P 500. %Above 50-day SMA surged above 70% in early November (green arrow) and remained largely above 70%. The blue lines are set at 60% and this advance could continue as long as this indicator holds above 60%. The move below 60% in early September signaled the start of a corrective period.
There is no change in the Sector Breadth Model, which is almost all green. All eleven sectors are net bullish and 31 of 33 indicators are net bullish. Tech, Healthcare, and Communication Services have been net bullish since April. Consumer Discretionary, Industrials, Consumer Staples and Materials have been net bullish since July.
Yield Spreads and Fed Balance Sheet
The AAA and BBB spreads narrowed from late September to early December, and reached levels not seen since before the covid-19 crash. AAA spreads are at normal levels and there are no signs of stress at the investment grade end of the bond market.
The Junk and CCC spreads narrowed dramatically from late September to mid December. Junk spreads are back at pre-covid levels and CCC spreads are at 8.44, which is the narrowest since May 2019. For reference, CCC spreads were last below 8 from April to October 2018. Oil was above $70 in October 2018 and then plunged below $50 by yearend. And then moved back to the mid 60s by April 2019. That was one heck of a ride.
The Fed balance sheet expanded by $120 billion and this was the largest increase since mid May. Overall, the balance sheet slowly expanded from mid July to early December, and then jumped above $7.3 trillion this past week. I love the taste of Kool-Aid in the morning.