In mid July, the major indexes started making new highs. The Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) broke higher first, followed by the NASDAQ 100 (NDX) then the NASDAQ Composite. The pattern on a weekly chart of SPX shows a long consolidation followed by a breakout, retest, and subsequent rally. This suggests that the market should continue to move higher in the intermediate term. Although most of the major indexes have reached new highs there are still a few holdouts. The most significant holdout is the Dow Jones Transportation Average (DJTA). It is still 17% below the December 2014 high. From a Dow Theory perspective, DJTA is still about 3.5% away from signaling a bull market (needs a move above its last secondary high). The industrials however, are above their last secondary high so a Dow Theory non-confirmation is currently in place. With the SPX showing a strong bullish chart pattern I suspect DJTA should signal a bull market in the coming weeks/months. Nevertheless, keep
It’s been a while since I highlighted some breadth indicators so here we go. First is the NYSE Advance / Decline line (NYAD). All I can say is Wow! NYAD is telling us that small cap stocks were the place to be coming out of the February low. Comparing the S&P 500 Equal Weight Index (SPXEW) against the S&P 500 (SPX) shows us how big cap stocks have performed against mega cap stocks. The move out of the February low showed widespread buying of big cap stocks, while mega caps lagged. This was a rotation out of the safety trade. Then we got a bit of consolidation in SPX as investors took some profit in big caps and re-allocated it to mega caps. Now it looks like the market is getting ready to run again, fueled by big caps. The percent of SPX stocks above their 200 day moving average (SPX200) shows the same picture as SPXEW. Widespread buying of big caps, followed by some consolidation, then renewed widespread buying.
Over the past week my core market health indicators bounced around a bit. One thing of note is my core measures of risk. They are getting close to a very bullish condition. The current pattern of this category of indicators is similar to late 2012 just as the market was starting a strong rally. I’ll be watching this indicator closely over the next few weeks to see if the bullish conditions persist (or turn back over which will signal a decent sized consolidation ahead).
Over the past week the majority of my core market health indicators improved. Most notably is the market strength category. It has finally pushed above zero, resulting in a change to the core portfolios. The new allocations are as follows. Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short Volatility Hedged portfolio: 100% long (since 7/1/2016) In early July, I highlighted some problems with leadership in the market. Most of those problems have been resolved. As you know, I’ve been watching the ratio between the Nasdaq 100 (NDX) and the S&P 500 (SPX). It made a good break higher two weeks ago and is currently fueling the rally as NDX plays catch up to SPX. One thing that hasn’t fully resolved itself is the ratio between the S&P 500 Equal Weight index (SPXEW) and SPX. The current rally has this ratio moving sideways, which shows lackluster participation from the “smaller” big cap stocks in SPX. If the ratio