Timing Models – Large-cap Techs Continue to Lead, but Breadth Indicators Weaken Elsewhere

The rock and the hard place is back. The major index ETFs are in medium-term uptrends that started in late March and have yet to reverse. These uptrends, however, are hitting resistance as the 200-day SMAs come into play for SPY and IWM. QQQ left its 200-day in the dust a long time ago.

Large-cap techs and Healthcare continue to carry the market, but signs of underlying weakness are starting to appear in other key sectors. 20-day lows expanded in the S&P 500, the S&P 500 breadth model remains net bearish and the sector breadth model deteriorated with new bearish signals this week.

The short-term remains a tough call because SPY is consolidating near its 200-day and the turn of the month period has a bullish bias. Yield spreads are largely back to normal and everyone knows the Fed has its bazooka loaded when needed. Can it be that easy!? Even so, I will be watching the June lows in SPY and other key ETFs. Breaks of these lows would forge the first lower low since the rally began and signal the start of some sort of downtrend.

SPY Holds Upswing and 40-week

SPY is holding its upswing and uptrend on the weekly chart. The ETF surged above the 40-week SMA in record speed and then formed a big outside reversal three weeks ago. There was some downside follow through the following week with a dip below the 40-week SMA, but SPY managed to close above 300 with a white candlestick. This week is showing indecision with little change since Monday’s open.

The bulls get the benefit of the doubt as long as the low of the white candlestick and the 40-week SMA hold (call it 295). In the indicator window, the PPO(5,35,5) turned up in late March and crossed above its signal line in mid April. The bulls also get the benefit of the doubt as long as the PPO remains positive. A move into negative territory would mean the 5-week EMA moved below the 35-week EMA.

Programming Note: All work and no play makes Jack a dull boy. Thus, I am taking a long week off from July 3rd to July 11th. There will be no reports or updates that week 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.

Bullish Pennant versus Bearish Aroon Cross

SPY surged after the flag breakout in May and the medium-term uptrend remains in place. The chart below shows SPY falling sharply on Wednesday and firming with a bounce on Thursday. Overall, a pennant could be taking shape and this is a short-term bullish continuation pattern. A breakout at 315 would signal a continuation higher and open the door to a new 52-week high. Also notice that RSI dipped into the 40-50 zone on Wednesday and ticked up on Thursday. Thus, a short-term bullish setup is in the works.

Turn of the Month is Bullish

We are in the “turn of the month” and this period has been a bullish seasonal period over the last twenty years, in both bull and bear markets. The turn of the month extends from the last four days of the month to the first four days of the next month. The current period would extend from the close on June 24 to the close on July 7th and extend from June 25, 26, 29 and 30 to July 1, 2, 6 and 7. It is quite an extended period because it also includes two weekends and July 4th, which is observed on July 3rd.

A 20 year backtest for SPY shows that this eight day turn of the month period was up 67% of the time and the average gain was 2% (sans dividends). SPY was down 33% of the time and the average loss was 2.26%. This year alone the turn of the month returned the following: Dec-Jan +.50%, Jan-Feb +3.24%, Feb-Mar -6.2%, Apr-May -.45% and May-June +5.4%.

Now here is the crazy thing. Simply owning SPY during this eight day turn of the month period returned 7.67% per year (Compound Annual Return) and outperformed buy-and-hold with a Maximum Drawdown of 18.85%. Furthermore, this strategy was only invested 38% of the time! The image below shows the equity curve in green and SPY buy-and-hold in blue (without dividends).

A Medium-term Indicator Flips

The next four charts will update some medium-term indicators that cover immediate uptrend (late March to June). The first chart shows SPY with 20-day High-Low Percent moving below -10% on Wednesday and hitting -32.9% on Thursday. This means the number of 20-day lows is expanding and downside participation is broadening.

Admittedly, the two red bars on May 13th and 14th marked a short-term oversold condition that preceded the flag breakout. It is hard to know which way to lean right now because the intermediate uptrends are strong, but the long-term breadth model for SPX is bearish. Normally I would ignore short-term bearish signals in an uptrend, but I am on alert for short-term bearish signals because the long-term breadth model for the S&P 500 is currently bearish.

The second chart shows the High-Low Lines working their way higher again this week, even though the total number of new highs remains at low levels. The following new highs were registered on Monday: SPX 24, MID 7, SML 11 and NDX 21. The Nasdaq 100 is the clear leader in this group and its High-Low Line was the first to turn up (April 15th). The SPX High-Low Line turned up on April 17th. All four remain above their 10-day EMAs. Downturns and move below the 10-day EMAs would be negative and suggest that the medium-term uptrend is reversing.

The third chart shows the Bullish Percent Indexes for the S&P 500, S&P 100 and Nasdaq 100. All three were near 90% on June 10th and fell the last few weeks. The S&P 500 BPI fell to 51.4% and is the weakest of the three. This means that 51.4% of stocks have double top breakouts (higher highs) and 48.6% have double bottom breakdowns (lower lows). The number of stocks with lower lows is increasing and a move below 40% in two of the three would turn this group bearish.  

There is a fourth indicator group that I will highlight today, the percent of stocks with silver crosses. This is a DecisionPoint indicator available at StockCharts. A silver cross occurs when the 20-day EMA moves above the 50-day EMA. The chart below shows this indicator for SPX, NDX, MID and SML. All four turned up in mid April and moved above their 20-day EMAs (pink lines). They exceeded 80% on June 10th and then turned down. Nevertheless, they are still a relatively high levels (>65%). The Nasdaq 100 indicator crossed below its 20-day EMA on Thursday, but the other three remain above, by a whisker.

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
  • 24-Apr: At least 2 of 3 High-Low Lines Rising (SPX, MID)
  • 9-Apr: Mid-cap short-term breadth model turns bullish
  • 9-Apr: Small-cap short-term breadth model turns bullish
  • 26-Mar: SPX, OEX, NDX Bullish% Indexes exceed 60%
  • Nasdaq 100 and Technology sector leading
  • Yield Spreads back to 2019 Levels
  • Fiscal Stimulus
  • 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

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

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

These charts are not linked, but you can find comparable charts from StockCharts at the end of this commentary with links.

The second chart shows SPY just above its 200-day SMA. The first indicator window shows the 5-day SMA just above the 200-day SMA. The bottom window shows the breadth model signals. There was a brief bullish signal, but the model flipped back to bearish on June 11th.

About the Long-term Breadth Model

The long-term breadth model is based on data from Norgate and shown using Amibroker software. Norgate has breadth data going back to 2001 and the indicators are based on prices that are not adjusted for dividends, which is the industry standard. There is nothing wrong with StockCharts’ breadth. I just prefer using unadjusted data for breadth and need more history for testing. 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 bullish/bearish thresholds for the middle indicators increase at the same rate (plus/minus 10) as the moving average increases by 50 days. This is a trend-following type model that turns bullish as percentage of stocks in uptrends increases, new highs increase and a breadth thrust is present. The model is bullish when at least three of the five indicators are on bullish signals and bearish when at least three of the five are on bearish signals. 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 Breadth Model is Bullish

The Nasdaq 100 breadth model turned bullish on May 20th and remains bullish. In fact, all five indicators have been bullish since May 29th. Stocks in the Nasdaq 100 account for around 40% of the S&P 500 and these stocks are keeping the S&P 500 afloat. Party like it’s 1999!

With Norgate and Amibroker, I was also able to build a model specific to Nasdaq 100 stocks. The model uses the same indicators applied to stocks in the Nasdaq 100. The long-term model turned bullish on May 20th and remains bullish with 5 of 5 indicators on bullish signals (green 5). The short-term model turned bullish on April 29th and remains bullish (green 3). Also notice that the 5-day SMA for QQQ crossed the 200-day SMA way back on April 14th.

Sector Breadth Model Deteriorates

Norgate does not have sector breadth data so I will stick with StockCharts’ for the sector breadth table. The model remains net bullish, but the sum of the weighted signals fell below +20% because of some new bearish signals. In particular, the %Above 200-day EMA fell below 40% to trigger bearish for Communication Services, Industrials and Materials. Elsewhere, the 10-day EMA of Advance-Decline Percent moved below -30% to trigger bearish for Utilities and REITs.

Even though the sum of the weighted signals is still positive, eight of eleven sectors are net bearish and 18 of 33 indicators are on active bearish signals. Again, Healthcare and Technology account for over 40% of the S&P 500 and they are largely keeping the broader market afloat. The Consumer Discretionary, Finance and Industrials sectors are net bearish and the %Above 200-day EMA for each is below 45%.

Small and Mid Cap Models Are Bearish

The S&P MidCap 400 breadth model turned bearish on June 10th, MDY moved below its 200-day on June 11th and the 5-day SMA moved below the 200-day on June 12th. This is a bearish configuration for mid-caps.

The S&P SmallCap 600 breadth model has been bearish since February 25th and the 5-day SMA for IJR has been below the 200-day SMA since February 27th. IJR poked its head above the 200-day SMA in early June, but fell right back below and remains in bear mode overall.

Yield Spreads and Fed Balance Sheet

The AAA and BBB bond spreads fell back to the 2019 highs (pre-crisis levels) and then stabilized the last two weeks. This means credit conditions at the investment grade end of the bond market are “normal”. The return to normalcy took away a negative for the markets and supported the rise in the S&P 500. I am not sure if spreads will narrow (fall) much further.

Junk bond spreads fell sharply in two phases and this decline facilitated a rise in the S&P 500. The Junk spreads and CCC spreads did not get back to their 2019 highs and did not fully return to normal. Both stabilized the last two weeks and even edged higher. An upturn in junk bond spreads would show stress in the credit market and this would be negative for stocks – until the Fed steps in.

The Fed balance sheet contracted again this past week, but the contraction was a lot smaller than the prior week (12 billion versus 74 billion). A let up in monetary easing could take the bid out of stocks, but there is still around $3 trillion floating around out there to keep the pump primed.

Thanks for tuning in and happy Friday!

Here are some comparable breadth indicator charts from StockCharts.

-Arthur Hill, CMT
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