The rally is gaining steam (momentum), the leadership circle is broadening (new highs) and the riskiest stocks are leading (small-caps). We are also starting to see stories suggesting that this rally is unstoppable. Maybe it is, maybe it isn’t. There will be a pullback at some point, but it is much harder to time “overbought” pullbacks than oversold bounces. The big trend and bull market are the dominant forces at work in the stock market. This is why stocks can become overbought and remain overbought, and why seemingly overextended conditions don’t always give way to pullbacks. Nevertheless, I am watching two medium-term breadth indicators for signs that a correction may unfold. No signs yet.
SPY and QQQ Extend on Breakouts
The weekly chart for the S&P 500 SPDR (SPY) pretty much says it all: bullish. SPY surged some 53% in 23 weeks, consolidated for around 11 weeks and broke out with a strong open on November 9th (Vaccine day or V-day). The breakout held and the ETF continues to work its way higher with another 52-week high this week. The breakout zone in the 350-360 area turns first support to watch should we get a throwback.
The weekly chart for QQQ tells the same story: big advance, triangle consolidation, breakout and continuation of uptrend. The breakout zone in the 290-300 area turns first support should we see a throwback.
IWM Leads the Vaccine Charge
The Russell 2000 ETF (IWM) remains on another planet with a 6+ percent advance this week and a 35+ percent advance the last ten weeks. IWM broke out to new highs with the open on November 9th and never looked back. IWM was considered overbought four weeks ago when it was over 30% above its 40-week SMA. It is now some 34% above this SMA and this is a record.
Breadth Models Remain Firmly Bullish
There is no change in the breadth models. As the images below show, all five indexes are net bullish on the Trend Breadth Model table and four of five are bullish on the Thrust Breadth Model table.
The next image shows the model signals for the S&P 500 over the last five years. Currently all five Trend Model indicators are bullish and the 5-day SMA is above the 200-day SMA. The model has been bullish since July 16th (2020).
The bottom window on the chart above shows that all three thrust model indicators are bullish, and the model has been net bullish since April 28th (2020).
Two Indicators to Watch for a Correction
The next chart shows the Trend Breadth Model and indicators for the S&P 500. First, notice that new highs exploded this week as High-Low Percent exceeded +20% for the first time since January 2020. Also notice that SPX %Above 100-day SMA is holding above 75% and strong. I am watching this level for signs of medium-term deterioration that could foreshadow a correction. No signs yet.
The next chart shows the Thrust Breadth Model and indicators for the S&P 500. The %Above 50-day SMA has been strong since early November when it moved back above 70%. The indicator has yet to dip below 60% and this is the level I am watching for signs that a correction may be unfolding. No signs yet.
Utes and Energy Turn Bullish Again
There were some new signals over the last two weeks. The 10-day EMA of XLU AD% surged above 30% and XLU %Above 200-day EMA exceeded 60% to turn bullish. This means two of the three indicators are bullish and the Utilities sector is net bullish. Elsewhere, the 10-day EMA of XLE AD% surged above 30% on Thursday and this sector flipped back to net bullish. Note that XLU was covered in Thursday’s commentary as it attempts to break out of a corrective wedge.
Sector weights are shifting with price action and recent gains in XLF, XLB and XLE. With a breakout and big move, Finance is now slightly bigger than Communication Services. Similarly, Materials jumped ahead of Utilities and Energy rose from last place to surpass Real Estate.
Defense Lags and Offense Leads
Even though XLU turned bullish, it is the only sector sporting a loss over the last 46 days (since the close on October 30th). The Real Estate SPDR (XLRE) and the Consumer Staples SPDR have the smallest gains, which makes sense because these are defensive sectors and the market is playing offense right now. The Energy SPDR, Finance SPDR and Materials SPDR are the leading sectors since November.
New Highs Expand - Big Time
The next image shows the High-Low Percent numbers from StockCharts. The Materials SPDR is leading the pack, but there are only 28 stocks in this sector. Note that the big chemical companies dominate here (LIN, ADP, DD, ECL, DOW, PPG, LYB). More than 30% of stocks in the Finance SPDR and Technology SPDR recorded new highs. These ETFs have over 60 stocks each. Elsewhere, over 20% of stocks in the Industrials SPDR and Healthcare SPDR recorded new highs. This expansion of new highs shows broadening of leadership and this is bullish.
Yield Spreads and Fed Balance Sheet
AAA yield spreads normalized way back in June when they first moved back below their pre-crisis highs and narrowed even further from early October to early December. They leveled out since early December and remain at low levels, which shows no stress in the credit markets. The BBB yield spreads continued to narrow and are back near their January 2020 lows.
The Junk and CCC spreads continued to narrow and recorded new lows for the cycle, since the narrowing started in late March. The continued narrowing at the junk end of the bond market shows improving confidence in lower grade borrowers and this is net positive for stocks, especially banks and energy.
The Fed balance sheet contracted over the last two weeks, but the contraction was relatively modest. Overall, the balance remains with a slow expansion since mid July and this is supportive for stocks.