Timing Models – Broad Strength Remains, Breakouts Extend, QQQ Returns, Yield Spreads Narrow Further

Just when you thought it could not get any better, we are seeing fresh new highs in SPY, a resurgence in QQQ, new lows in the yield spreads and a new high in the Fed balance sheet. Over 90% of stocks in the S&P MidCap 400 and S&P SmallCap 600 are above their 200-day SMAs and 150-day SMAs, while over 85% of stocks in the S&P 500 are above these moving averages. Breadth and price action are strong so what could go wrong?

So far this week, small-caps are actually taking a breather and lagging large-caps, and large-cap techs. IWM is up less than 1% so far this week, while SPY is up over 2% and QQQ is up over 4%. IWM is still leading over the last 12 weeks with a 39% surge since early October. SPY is up around 18% and QQQ is up around 22%.

We do not need a momentum oscillator or sentiment indicator to figure out that stocks are quite extended after huge moves the last 12 weeks. Overextended or overbought conditions, however, are not always great for timing a correction. There will be a correction at some point and this will create the next opportunity.

Currently, I do not see any signs of deterioration in the breadth indicators that would point to a correction in the major index ETFs (SPY, QQQ, IWM). SPY and QQQ do not look that extended on the price charts, but IWM is another story. Nevertheless, I think we are in the trend-monitoring phase right now. The setups and breakouts have passed. It is simply time to observe price action, plans active trades and wait for the next setup/signal.

SPY and QQQ Hit New Highs

The chart below shows the S&P 500 SPDR (SPY) breaking out of a triangle with a 18% advance the last twelve weeks. More than half of this advance occurred in the first two weeks  because SPY is up just 7.3% the last ten weeks. Just 7.3%! Since when is a 7.3% advance seem normal or average? It is not average.

Whatever the state of the market, the chart shows a 53% surge, an 11 week consolidation, a breakout and an extension after the breakout. Oh, and a few new highs along the way. This is all bullish with the breakout zone in the 350-360 turning into the first support zone to watch should we get a correction.

The next chart shows QQQ with a market leading gain this week, and another new high. QQQ is still lagging IWM over the last 12 weeks, but by no means bearish. The chart is pretty much the same as SPY: surge, consolidation, breakout, extension and new highs. The breakout zone in the 290-300 area turns first support should we see a pullback.

Small-Caps are Very Extended

The next chart shows the Russell 2000 ETF (IWM) with a breakout to new highs in early November and a market-leading surge the last 10-12 weeks. The current advance is the largest 12-week advance since May 2009. IWM continued to a new high the next week and then corrected the following five weeks. It was a garden variety correction within an uptrend because the subsequent July breakout led to new highs.

Breadth Models Remain Unchanged and Bullish

There is nothing new to report for the Trend and Thrust Breadth Models. As the chart below shows, the S&P 500 Trend Model has been bullish since July 20th and all five indicators are on bull signals. The S&P 500 Thrust Model has been bullish since April 29th and all three indicators are on bull signals.

The tables below show the signal summaries for the five major indexes covered with the breadth models. All five Trend Models are bullish with only one bearish signal (out of 25 possible signals). Four of the five Thrust Models are bullish with 12 of 15 signals bullish. The S&P 100 turned net bearish in late October and two bearish indicators have yet to reverse their signals. Regardless, the bulk of the broad market evidence is bullish right now.

The next chart shows the five breadth indicators for the S&P 500 Trend Model. 89% of stocks are above their 200-day SMAs, 87.3% are above their 150-day SMAs and 85.71% are above their 100-day SMAs. This shows broad strength within the index. SPX %Above 100-day SMA continues to hold above the 75% level (blue shading). I am watching this medium-term breadth indicator for signs of deterioration (move below 75%). So far no signs of deterioration within the index.

You can learn more about the methodology and historical performance for these breadth models in this article.

The next chart shows the three indicators for the S&P 500 Thrust Breadth Model. SPX %Above 50-day SMA continues to hold above 60% and there are no signs of deterioration within the index right now. I will continue to watch this indicator for signs that a correction may unfold.

Finance Leads New High List

There is no change in the Sector Breadth Model, which remains unequivocally bullish. %Above 200-day EMA is 100% for two sectors (XLY, XLE) and above 90% for six sectors (XLF, XLB, XLC, XLV, XLK, XLI). XLRE is at 83%, XLP at 75% and XLU is bringing up the rear at 46%. There is actually broad strength in XLRE and the ETF is turning up within a long trading range.

Sector Breadth Model charts can be found on the Art’s Charts ChartList.

Yield Spreads and Fed Balance Sheet

Yield spreads continued to fall across the board and this shows continuing confidence in the debt markets. AAA and BBB yield spreads narrowed further in January and hit new lows for the move this week. AAA spreads are at their narrowest since January 2020 and BBB spreads are the narrowest since January 2018. Hmm…I wonder what happen to the S&P 500 then.

The Junk and CCC yield spreads narrowed further in January and hit new lows for the move this week. CCC spreads are their narrowest since September 2018, which was another “interesting” time for the S&P 500.

After three weeks with small declines, the Fed balance sheet expanded by $81 billion this week and total assets stand at $7.415 trillion, a new high.

Everything is certainly peachy right now, just as it was in January 2018, September 2018 and January 2020.  The S&P 500 was hit hard within a few weeks in each instance. This does not mean it will happen again. As always, I will simply monitor the yield spreads and reassess if/when we see a significant widening. This has yet to happen and yields spreads are currently a bullish influence for stocks.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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