We finally got a good breakout above the 2400 level on the S&P 500 Index (SPX), but my core market health indicators aren’t believing it. Most of them fell this week, which doesn’t bode well for a sustained rally. That’s not to say the market can’t chop upwards, but without underlying technical strength don’t expect huge gains. One thing I’ve been highlighting over the past few months is the ratio between SPX and equal weighted SPX. This ratio is telling us that mega cap stocks are where the money continues to flow. When this happens, the best the market can do is marginal new highs that are usually followed by chop. That’s what I expect to see until the ratio can get back above its 20 week moving average. Conclusion We’ve got a break to new highs, but underlying technical indicators aren’t confirming the rally. Expect hard fought gains followed by choppy market action.
Last week, I concluded: The market is trying to break out, but breadth isn’t improving. This condition often results in a choppy market. If the market can break out then bulls want to see breadth improve or we risk a good size decline when the rally ends. This week, it’s the same. Longer term indicators are trying to move into positive territory, but short term indicators and measures of breadth aren’t cooperating. My core indicators, which are intermediate term, chopped around a bit, but are still on a trajectory to go positive if the market can break decisively higher. Another disconcerting breadth indicator is the percent of stocks in the S&P 500 Index that are below their 200 day moving average. This indicator is falling fast without much price damage, all while happening within a few percent of all time highs. If the market turns down from here I suspect the decline will be large. On the other hand, this is a condition that can lead to a buying surge if
Over the past week, my core market health indicators bounced around a bit. They are mostly showing short term weakness, but longer term strength. This usually means the market should resolve higher. One thing of particular note is that my core measures of risk are deteriorating rapidly. This isn’t a normal occurrence near all time highs. The last time this occurred was in February of 2015 which was followed by several months of choppy movement, then a decent decline. This isn’t a prediction, just an observation and something to watch. Another thing I’m watching closely is various measures of breadth. The most significant at the moment is the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). When it is below its 20 week moving average the market usually chops around (at the least). This is exactly what we’ve seen since it fell below the line in early February. Another measure of breadth comes from the number of bullish stocks on the
Over the past few weeks, my core market health indicators improved significantly, with the exception of my measures of the economy. The strength seen suggests that the market wants to rally. Although my measures of trend and strength are still negative, they are on a trajectory to turn positive within a week or two. One thing of note is that the current strength is coming from mega cap stocks. This isn’t a healthy condition. Normally, a healthy rally will have broad participation from the stocks in the S&P 500 Index (SPX). This isn’t happening. Look at the ratio between SPX equal weighted (SPXEW). It is still falling. Bulls want to see this ratio turn up if the market breaks higher. Another sign of poor participation in the market comes from the percent of SPX stocks above their 200 day moving average. As SPX is approaching new highs, the percent of SPX stocks above their 200 dma is falling. This increases the risk that a breakout rally will be