Outside of sentiment and some extremes in price and breadth, one would be hard pressed to find negatives in the stock market right now. Stocks and risk assets are rising, while Treasury bonds and safe-havens are out of favor. Since November, SPY and QQQ are up more than 12% and IWM is up more than 20%. Oil and copper are up double digits. Clearly, the reopening trade has center stage.
The 7-10 Yr Treasury Bond ETF (IEF) and 20+ Yr Treasury Bond ETF (TLT) are flat since November, but they are down since August. Gold and the Dollar both declined over the last five weeks and this is something you do not see very often. I have know idea what it means. The Dollar seems to be the safe-haven currency and gold is an uncorrelated alternative to everything else. Who needs gold when all other risk assets are rising.
The chart below shows the 20+ Yr Treasury Bond ETF (TLT) and Gold SPDR (GLD) falling since August and SPY breaking out of a triangle consolidation in early November.
The next chart shows the Dollar Bullish ETF (UUP) breaking down as the Euro ETF (FXE) and Yen ETF (FXY) break out to the upside. Notice that the Dollar is below the falling 200-day SMA, while the other two are above their rising 200-day SMAs.
Admittedly, stocks are looking frothy, but this does not mean they cannot get even frothier. Keep in mind that the consolidation breakouts in SPY and QQQ are quite recent. We could also see a yearend melt-up as performance chasing underinvested portfolio managers play catchup. Thus, a bid could remain in stocks until early January.
SPY Holds Triangle Breakout
There is no doubt on the direction of the big trend and there is no doubt on the triangle breakout. SPY is in a long-term uptrend and the triangle breakout is holding. The ETF surged some 50% in 22 weeks, consolidated for 10 weeks and broke out four weeks ago. Even though follow through has been a bit tepid, the breakout has yet to be proven otherwise.
A move back below the breakout zone would be seen as a massive failure by the Ursa Major Club. However, it is not uncommon for an advance to slow and zigzag after a sharp move. SPY surged a measly 22% in the first four months of 2019 (17 weeks) and then worked its way higher the next 23 weeks as a rising wedge unfolded. In my book, a rising wedge that hits new highs is NOT a bearish pattern.
In any case, the blue dashed lines show the boundaries of a possible rising channel. Price is currently near the upper line, but I would not call this resistance. Trendlines based on rising peaks are not very good resistance markers. This is why I drew a dashed line with lots of holes.
QQQ Re-Joins the Party
The next chart shows QQQ with similar characteristics. SPY broke out two weeks before QQQ and QQQ played catchup with a breakout over the last two weeks. The patterns are the same: surge, triangle, breakout and continuation higher. QQQ has more room to run before hitting the hole-laden trendline marking a possible rising channel.
Extreme, And Staying Extreme
We are no doubt hearing a lot about extremes in the market right now. As the table below shows (right side), 100% of stocks in the Finance SPDR (XLF) and Consumer Discretionary SPDR (XLY) are above their 200-day EMAs. It doesn’t get any better than this.
Even though XLF and XLY are leading the 200-day EMA category, the real leaders are still found in tech because XLK High-Low% ($XLKHLP) is at 22% and the second highest on the table. Note that XLK has 72 stocks and XLC has just 22 stocks, four of which count twice because of two different classes (GOOG, DISK, FOX, NWS). Thus, 15 stocks in XLK hit new highs and this sectors has more true leaders.
Returning to extremes…We all know that stocks can become overbought or overextended and remain so during strong uptrends. We also know that sentiment measures can reach extremes and fail to mark a top. The CNN Fear & Greed index hit 85 this week (extreme greed) and four weeks ago the AAII bull-bear differential hit its highest level since February 2018. These might be right one day, but sentiment indicators are notoriously fickle. Trend and price action matter most. Thus, take all the talk of extremes with a bucket of salt.
The chart below shows the percentage of S&P 500 stocks above the 200-day SMA (middle window) and the 1/200 Price Oscillator for SPY (percent above/below 200-day SMA). Over 90% of S&P 500 stocks are above their 200-day SMAs and SPY is over 15% above its 200-day SMA. The blue arrows show the last three occurrences. The string from August to December 2009 counts just once and the other occurrence was February 2011. Hard to make a call with just two prior occurrences.
On the face of it, we are seeing some seriously broad participation when more than 90% of S&P 500 stocks are above their 200-day SMAs and this is bullish. Below is a quote from a tweet I saw in my feed recently.
S&P 500 Breadth Remains Bullish
The S&P 500 breadth models and trend remain bullish. All five Trend Model indicators are bullish, all three Thrust model indicators are bullish and the 5-day SMA is above the 200-day SMA. This present situation is bullish and we should expect bullish outcomes as long as the evidence points to a bull market.
There is no change in the other breadth models. The Thrust Breadth Models are bullish for four of the five major indexes and these four have been bullish since April. The S&P 100 Thrust Model Triggered net bearish with the decline into late October. As noted before, 100 large-cap stocks not very representative of the market as a whole and this is why I follow more than one model.
All five Trend Breadth Models are bullish and there is just one bearish signal in the entire model (the 10-day EMA of S&P 100 AD%). These trend models show broad strength in the stock market. Of note, the High-Low Percent indicators for the S&P SmallCap 600 and S&P MidCap 400 were the most recent to turn bullish as we saw an expansion of new highs in mid November.
There is no change in the Sector Breadth Model this past week, but I left on the blue ovals to mark the changes in the Energy sector. The 10-day EMA of AD% surged above +30% for a breadth thrust and the %Above 200-day EMA exceeded 60% to show broad participation. Both signals triggered on November 24th and were detailed in Monday’s report.
Yield Spreads and Fed Balance Sheet
Yield spreads narrowed even further over the last two weeks with the AAA and BBB spreads reaching new lows for the cycle (since mid March). The narrowing of these investment grade bond spreads coincides with relative strength in the Corporate Bond ETF (LQD), relative to the 20+ Yr Treasury Bond ETF (TLT) that is. This narrowing shows confidence in the credit markets and this is also a positive for banks (fewer defaults).
Junk bond spreads also narrowed and reached new lows for the current cycle, which began in mid March. Junk bond spreads are near 4% and CCC bond spreads fell below 9%, in rather dramatic fashion. The sharp decline in CCC bond spreads is likely tied to the rebound in oil and energy stocks. Yes, there are a lot of junk bonds tied to oil.
There was not much change in the Fed balance sheet over the last two weeks: one week down and one week up. Overall, the balance sheet continues its slow expansion since mid July and total assets remain well above $7 trillion.