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Timing Models – SPY Leads, QQQ Perks Up, SPX Leads Composite Breadth Model and Yield Spreads Narrow (Premium)

The S&P 500 SPDR hit a new high to affirm the bull market and three sectors confirmed this new high. The Consumer Staples SPDR, Materials SPDR, Industrials SPDR and Real Estate SPDR recorded new highs at some point this week. Even though the other big sectors did not hit new highs this week, they are in uptrends and within three percent of new highs. These include the Technology SPDR, Consumer Discretionary SPDR, Communication Services SPDR, Finance SPDR and Healthcare SPDR. Plainly put, strength in the market is broad. Also note that we are in the middle of the turn-of-the-month seasonal pattern and April is historically the strongest month of the year. See last week’s commentary [1] for details on these seasonal patterns.

The image below shows weekly CandleGlance charts for SPY and the 11 sector SPDRs. The 52-week price channel is pink with the lower line representing the 52-week low and the upper line the 52-week high. This makes it easy to see which sectors closed above the upper line of the 52-week channel this week and finished at 52-week highs.

Report Summary

  • SPY: long-term uptrend and short-term uptrend (leading).
  • QQQ: long-term uptrend and short-term uptrend.
  • IWM: long-term uptrend and short-term uptrend (lagging).
  • S&P 500: 5-day SMA crossed above 200-day on May 29th (uptrend).
  • Composite Breadth Model: bullish since May 29th (bull market).
  • The Fed Balance sheet contracted a small amount this week.
  • Yield spreads narrowed to multi-year lows.

New High in SPY

The S&P 500 closed above 4000 for the first time ever and SPY closed at an all time (closing) high. Large-caps are leading right now and the new high in SPY confirms the bull market. There is really nothing new with SPY as it simply continues to work its way higher since the early November surge-breakout. QQQ took a rest with a pullback from mid February to early March and then turned up the last few weeks. IWM has been flat the last two months. All three are in long-term uptrends.

Large-caps are Back

The short-term chart shows SPY with a breakout on March 9th, fresh new highs the following week and another new high on Thursday (above the red line). QQQ has yet to hit a new high, but it exceeded its mid March high (red line) and is keeping pace with SPY since the March 8th low. IWM is lagging because it forged a lower low in late March and remains below the mid March high. I would not call IWM bearish. It is just a little less bullish than SPY and QQQ.

Composite Breadth Model: Bull Market

The Composite Breadth Model defines the market regime and remains in bull market mode with all five inputs bullish.

Declines and consolidations are considered corrections within the bigger uptrend as long as the Composite Breadth Model is net bullish. Note that this model is designed to absorb corrections and not turn bearish until the weight of the evidence is bearish.

Model and indicator charts can be found on the Market Regime page [2]. These include the S&P 500 Thrust Model, S&P 1500 Thrust Model, S&P 500 Trend Model and S&P 1500 Trend Model.

You can learn more about the methodology and
historical performance for these breadth models in this article. [3]

Yield Spreads and Fed Balance Sheet

The AAA bond spread remains at low levels overall and this is net positive for stocks. The spread widened a little from mid February to early March and then narrowed again the last few weeks. At .47, the spread is the narrowest in over 10 years! This means AAA rated corporate bonds, such as those from Microsoft, yield around .50 percent above US Treasury bonds. The BBB spread also narrowed the last few weeks and is back near its mid February lows.

The BBB yield spread is the difference between the yield on BBB corporate bonds and US Treasury bonds. BBB bonds are the lowest rated investment grade bonds. A narrowing spread (falling) shows increasing confidence in the credit market, while a widening spread (rising) shows increasing stress. Overall, narrow (low) spreads show confidence and wide (high) show stress.

Junk and CCC bond spreads also narrowed and hit multi-year lows. Junk bond spreads are at their narrowest (lowest level) since October 2018, while CCC spreads are at their narrowest since July 2014.

The CCC spread is the yield difference between CCC corporate bonds and US Treasuries. CCC bonds are the lowest rated junk bonds (riskiest). A narrowing spread (falling) shows increasing confidence in low quality bonds, while a widening spread (rising) shows increasing uncertainty. Overall, narrow (low) spreads show confidence and wide (high) show stress.

The Fed’s balance sheet contracted by $31 billion this past week. Overall, the balance sheet has been expanding since mid July and remains near its all time high ($7.72 trillion).

Thanks for tuning in and have a great day!