Timing Models – A Three Legged Bull

The mighty Nasdaq 100 and related technology groups continue to lead the market. In fact, one could even suggest that they are holding up the broader market, with some help from the Communication Services and Healthcare sectors. Together, these groups account for a big chunk of the S&P 500. Despite a big pocket of strength, there are also some sizable pockets of weakness. In particular, the Consumer Discretionary, Industrials and Finance sectors are dragging their feet, as are small-caps and mid-caps.

We are six months into 2020 and two groups seriously stand out this year: QQQ and Biotechs. Yes, just two. Given the rip higher since mid March, one would think that the whole market is on fire. It is not. The PerfChart above shows performance for SPY, RSP, QQQ, MDY and IWM as the first five. SPY is down 2.53%, but its equal-weight brother (RSP) is down 11% (not counting today). QQQ is leading the pack with an 18% gain, but MDY and IWM are down over 13%.

Next we have some equal-weight sectors and the Biotech SPDR (XBI), which sticks out like an orange thumb. The EW Technology ETF (RYT) and EW Healthcare ETF (RYH) are up slightly, but the rest are down. The EW Communication Services (EWCO ) is down around 4%. Meanwhile the EW Industrials ETF (RGI) is down over 11%, while the EW Consumer Discretionary ETF (RCD) and EW Industrials ETF (RGI) are down around 20%.

So, yes, there is some serious strength in QQQ, Technology, Communication Services and Healthcare. After that, it gets much more selective. Basically, we have a bull market built on three sectors. The rest of the market is not participating and should be avoided for now.

Programming Note: I am taking an extended week off from Friday July 3rd to Saturday July 11th. I will add a video and update the chart list on Friday, though. There will be no reports or updates during vacation because I will be spending some quality time with family. I will update the breadth models on return and post an update on Monday, July 13th. Have a fun and safe 4th of July weekend!

Bullish versus Bearish Run Down

Here is a bullish/bearish run down of current signals for several indicators and a few events.

Bullish Indicators

  • 29-May: S&P 500 5-day SMA moves above 200-day SMA
  • 20-May: Nasdaq 100 long-term breadth model turns bullish
  • 29-Apr: S&P 500 short-term breadth model turns bullish
  • 29-Apr: Nasdaq 100 short-term breadth model turns bullish
  • 16-Apr: At least 2 of 4 High-Low Lines Rising (NDX, SPX)
  • 9-Apr: Mid-cap short-term breadth model turns bullish
  • 9-Apr: Small-cap short-term breadth model turns bullish
  • 26-Mar: SPX, OEX and NDX Bullish% Indexes exceed 60%
  • Nasdaq 100 and Technology sector leading
  • AAA and BBB yield spreads back to 2019 Levels
  • Unprecedented Fiscal and Monetary Stimulus

Bearish Indicators

  • 24-June: 20-day High-Low Percent for SPX turns bearish
  • 11-June: S&P 500 long-term breadth model turns bearish
  • 10-June: Mid-cap long-term breadth model turns bearish
  • 25-Feb: Small-cap long-term breadth model turns bearish

Medium-term Indicators are Net Bullish

Two of the three medium-term indicators that I am tracking are bullish. The Bullish Percent Indexes dipped in June, but did not cross their bearish thresholds. SPX-BPI dipped below 50 and came the closest to its bearish threshold (40%). The OEX-BPI stabilized around 50% and the NDX-BPI stabilized just above 60%. Again, the Nasdaq 100 shows the most strength.

New highs continue to underwhelm on the whole, but there are still more new highs than new lows and this is pushing the High-Low Lines higher. Two of the four have been rising since April 16th (NDX and SPX). The mid-cap High-Low Line turned up on April 26th and the small-cap High-Low Line turned up on May 26th.  These rising High-Low Lines support the medium-term uptrend until two of the four turn down.

There is a glitch between my Dell XPS computer and Optuma software so I am showing the Norgate versions for 4-week High-Low Percent and the 4-wk High-Low Line. Norgate bases their 4-week highs and lows on closing prices so the numbers might be a little different. In any case, the lower window shows the number of 4-week lows plunging below -10% on June 24th. It has yet to reverse this signal with a cross above +10%. The green and red arrows mark prior signals on the chart. The middle window shows the 4-week High-Low Line moving below its 10-day EMA. It could move back above with a strong number today.

SPY Reinforces Medium-term Uptrend and Support

On the price chart for SPY, the 5-day SMA is above the 200-day SMA and SPY is bouncing off the 200-day SMA. The ETF opened strong on Thursday and is attempting to break out of the pennant formation. RSI is also bouncing off the 40-50 zone as momentum found support after becoming mildly oversold. This move reinforces support from the June lows and keeps the medium-term uptrend alive, and even kicking. This is the support zone to watch next week. The bulls have the edge as long as it holds.

The weekly chart shows SPY with a bearish outside reversal four weeks ago and a successful test of the 40-week SMA the last few weeks. The green zone marks the June low and upswing support. The indicator window shows the PPO(5,35,5) remaining above its signal line and in positive territory. This indicator is bullish as long as it holds above the signal line.

Bullish Turn-of-the-Month Ends Next Week

Note that the turn-of-the month appears to have kicked in over the last six days with SPY rising some 3%. This phenomenon, which was discussed last Friday, shows a bullish tendency that extends from the four last days of the month to the first four days of the next month. This bullish seasonal tendency will end on next Tuesday’s close.

S&P 500 Long-term Breadth Model Remains Net Bearish

The chart below shows the 5 indicators that make up the S&P 500 long-term breadth model. The red and green arrows on the price plot show the bullish and bearish signals. Currently, the 10-day EMA of Advance-Decline Percent and %Above 100-day SMA are on bullish signals. The %Above 150-day SMA, %Above 200-day SMA and High-Low Percent are on active bearish signals. This puts the model at -1 (net bearish).

Note that around 40% of stocks in the S&P 500 are above their 200-day SMAs and 150-day SMAs. This is well below 50% and shows the majority of stocks in long-term downtrends. High-Low Percent has yet to exceed +6% and we have yet to see a significant expansion in new highs.

The next chart shows the 5/200 day SMA cross in the middle window and the breadth model in the lower window. The 5-day SMA is above the 200-day SMA and SPY moved back above its 200-day this week. The breadth model, however, is net bearish since June 11th. This presents us with a bit of a mixed bag.

Article and Video Update

Note that I updated the article and video explaining the breadth indicators this week (click here). This article shows the signal dates since 2/1/2001, the equity curve, the drawdowns and the monthly/annual returns. The long-term breadth model is based on data from Norgate and shown using Amibroker software. The list below shows the indicators with their thresholds.

  • 10-day EMA of SPX Advance-Decline Percent: Bullish breadth thrust with move above +30% and bearish thrust with move below -30%
  • %Above 100-day SMA for S&P 500 Stocks: Bullish with move above 75% and bearish with move below 25%
  • %Above 150-day SMA for S&P 500 Stocks: Bullish with move above 65% and bearish with move below 35%
  • %Above 200-day SMA for S&P 500 Stocks: Bullish with move above 55% and bearish with move below 45%
  • S&P 500 High-Low Percent: Bullish with move above +10% and bearish with move below -10%

The model is bullish when at least three of the five indicators are on bullish signals (+1 or higher) and bearish when at least three of the five are on bearish signals (-1 or lower). It is never neutral because there are an odd number of indicators.

Testing suggests that the long-term breadth model performs best when combined with a trend indicator for the S&P 500, such as the 5/200 day SMA cross. A bullish signal triggers when the breadth model is positive AND the 5-day is above the 200-day. A bearish signal triggers when the breadth model is bearish OR the 5-day SMA is below the 200-day SMA.

Bullish versus Bearish Run Down

We do not have to look far to find the leader in the current market. QQQ surged to a new high this week and the Nasdaq 100 breadth model has been bullish since May 20th. In contrast to the S&P 500, some 74% of stocks are above their 150-day and 200-day SMAs, and some 86% are above their 100-day SMAs. Furthermore, around 16% of stocks in the index hit new highs.

Nasdaq 100 Price and Breadth Lead

Three of the five breadth indicators are bearish in the S&P 500 breadth model. The first chart shows the individual indicators. The 10-day EMA of Advance-Decline Percent and %Above 100-day SMA are bullish. In contrast, the %Above 150-day SMA, %Above 200-day SMA and High-Low Percent are bearish. The three long-term indicators are bearish

Note that some 82 stocks in the Nasdaq 100 are also in the S&P 500 and these 82 stocks account for some 40% of the S&P 500. Even though the S&P 500 is net bearish, a large portion is strong because of strength in the Nasdaq 100.

The next chart shows QQQ, the 5/200 day SMA cross and the Nasdaq 100 breadth model. The 5-day crossed the 200-day in mid April and the breadth model followed a month later. Large-cap techs led the initial surge and this is why price moved before the breadth model, which captures the index as a whole.

Sector Breadth Model Favors 3 Sectors

There are no new sector breadth signals and there is no change in the sector breadth model. The Consumer Discretionary sector moved into third place on the weighting as it edged above Communication Services. Even so, the difference in weighting is negligible (10.83% vs 10.79%). Technology and Healthcare are the strongest because all three breadth indicators are on bullish signals. Two of the three indicators for Communication Services are net bullish. Thus, three of the eleven sectors are net bullish, and eight are net bearish.

Technology, Healthcare and Communication Services account for 50% of the S&P 500. Throw in a few random bullish signals in other sectors, and the sum of the weighted signals is positive (+16.89%). Even so, strength in the S&P 500 is concentrated and not wide spread. At best, we have a mixed market when it comes to large-caps. At worst, we have underlying weakness in some key sectors: Consumer Discretionary, Finance and Industrials.

Small and Mid Cap Models Remain Bearish

The average stock in the S&P 500 is struggling, and so are mid-caps and small-caps. The first chart shows the S&P MidCap 400 with three failures in early June. MDY failed to hold above its 200-day, the 5/200 cross turned negative and the breadth model flipped back to negative.

The second chart shows the S&P SmallCap 600 SPDR below its 200-day in the top window, the 5/200 cross turning negative in late February and the breadth model turning negative in late February. IJR briefly got above its 200-day in early June, but the 5/200 cross and breadth model remained bearish.  

Yield Spreads and Fed Balance Sheet

Conditions at the investment-grade end of the bond market are back to normal and this is helping large-caps, which tend to be the higher quality issuers. The spread between US Treasury bonds and AAA corporate bonds fell back to pre-crisis levels (green line) at the end of May and flattened out in June. The same happened with the BBB spreads. These investment grade bond spreads are back to normal and are not an issue for the stock market at this point.

Conditions in the junk bond market are not as good as those at the investment end and this is part of the reason for relative weakness in small-caps. The spread between US Treasuries and Junk bonds also fell back to pre-crisis levels in early June (green line) and then edged higher the last few weeks. The red line marks 7% and a move above this level would show a potentially serious widening. The spread between US Treasuries and CCC bonds did not make it back to pre-crisis levels and remains elevated.

There was no new data from the St Louis Fed on the balance sheet. Regardless, the $3 trillion increase is in the system and still sloshing around. The balance sheet stopped expanding in June, but we have yet to see a serious contraction. The market is still in “don’t fight the Fed” mode.

Thanks for tuning in and happy 4th of July weekend!

Here are some comparable breadth indicator charts from StockCharts.

-Arthur Hill, CMT
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