The stock market remains mixed overall with pockets of serious strength and pockets of weakness. The Technology and Healthcare sectors continue to lead, while the Finance and Energy sectors lag. QQQ hit a new high and is leading SPY, while large-caps are leading small and mid caps.
There is no change in the breadth models. The S&P 500, S&P MidCap 400 and S&P SmallCap 600 breadth models are net bearish, while the Nasdaq 100 breadth model remains bullish. QQQ hit a new high and SPY remains above its 200-day SMA, but MDY and IJR remain below their 200-day SMAs. The S&P 500 sector breadth model improved this week with new signals in Industrials, Consumer Staples and Materials.
Even though the Fed balance sheet contracted a little over the last few weeks, this contraction pales relative to the prior $3 trillion expansion and barely makes a dent. The AAA and BBB yield spreads fell back to pre-covid levels and remain there, which is net positive for long-term. The junk and CCC spreads edged higher the last few weeks, but remain a tolerable levels. Fiscal stimulus (CARES Act) is set to end on July 31st, however, there is likely to be another push for more stimulus before the August recess.
I am back in the saddle after a week off with a little sand and sea. This update will cover the broad market environment: SPY, the medium-term uptrend indicators, the breadth models, the Fed balance sheet and the yield spreads. I will also update the ETF charts later today.
SPY Bounces off Rising 40-week
The S&P 500 SPDR bounced off its rising 40-week SMA the last two weeks to keep the bulls in the driver’s seat. SPY formed an outside reversal pattern five weeks ago and tested the 40-week SMA with this sharp pullback. A battle ensued at the 40-week and the bulls held their ground, before prevailing with the surge the last two weeks. The June-July lows mark key support and the trend is up as long as they hold. The indicator window shows the PPO(5,35,5) above its signal line and in positive territory. This momentum oscillator is bullish as long as it holds above the signal line.
Medium-term Indicators are Net Bullish
All three medium-term indicators are bullish. The Bullish Percent Indexes fell from early June to late June and then edged higher the last two weeks. They are well below their early June peaks, but above 50% and with active bullish signals. The Nasdaq 100 BPI is at 76% and leading the pack, by far. This group would turn bearish should two of the three move below 40%.
New highs in the Nasdaq 100 continue to impress, but continue to underwhelm in the broader S&P indexes. Nevertheless, all four High-Low Lines are rising and above their 10-day EMAs.
The next chart shows 4-week, 13-week and 26-week High-Low Percent for the S&P 500. The horizontal lines are set at +10% and -10%. 4-week High-Low Percent (first indicator window) crossed the plus/minus 10% level four times as SPY consolidated the last four weeks. This indicator is producing quite a few whipsaws because of choppy price action. 13-week High-Low Percent exceeded +10% in late May and remains largely positive. 26-week High-Low Percent has yet to exceed +10% and remains the laggard.
SPY Reinforces Medium-term Uptrend and Support
On the price chart, SPY bounced off the 200-day SMA in late June and broke out of a pennant formation. Price action turned flat near the breakout, but the breakout is largely holding and bullish until proven otherwise. The June-July lows combine to mark support in the 296-300 area. A break here would negate the pennant and reverse the medium-term uptrend.
The first indicator window shows RSI(14) becoming mildly oversold with a move into the 40-50 zone in late June and then moving back above 50. Momentum is back on the upswing. The second window shows Aroon Up surging above 70 and ending the parallel decline in these two indicators. This is a bullish indication that signals the end of the consolidation.
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 just over 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 difference between the 5 and 200 day SMAs in the middle window and the breadth model in the lower window. The 5-day SMA is above the 200-day SMA (green oval) and SPY moved back above its 200-day this week. The breadth model, however, is net bearish and has been since June 11th (red oval). SPY price is being driven by strength in large-caps and large-cap techs. Breadth is lagging because the “average” stock in the index is not keeping up.
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.
Nasdaq 100 Price and Breadth Lead
The Nasdaq 100 breadth model turned bullish on May 20th and all five indicators remain with bullish signals. In fact, some 20% of stocks in QQQ recorded new highs last week and over 75% remain above their long-term SMAs (100-day, 150-day and 200-day).
QQQ surged to another new high this week and the 5-day SMA is now over 20% above the 200-day SMA (22.12% to be precise). July to November 2009 was the last time the 5-day was more than 20% above the 200-day. QQQ is clearly stretched, but stretched is not always bearish.
Sector Breadth Model Improves
There were three new signals in the Sector Breadth Model last week and these three signals turned three sectors net bullish: Industrials, Consumer Staples and Materials. Overall, 6 of the 11 sectors are net bullish and 18 of the 33 indicators are on active bullish signals. The weighting of the Technology sector continues to increase and reached 27.93% last week. The sum of the weighted signals also increased to +40.66%.
Small and Mid Cap Models Remain Bearish
There is no change in the small and mid cap models. The S&P MidCap 400 SPDR (MDY) remains below its 200-day SMA, the 5-day SMA is below the 200-day SMA and the mid-cap breadth model has been net bearish since June 12th.
The S&P SmallCap 600 SPDR (IJR) has been below its 200-day SMA since June 10th, the 5-day SMA has been below the 200-day SMA since February 27th and the small-cap breadth model has been net bearish since February 25th.
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 the last six weeks. The same happened with the BBB spreads.
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 six 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. A move above 15% would be negative.
After a massive $3 trillion expansion, the Fed balance sheet contracted over the last five weeks. This contraction is quite minimal compared to the prior expansion and I would not view this as negative.
