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Breakout or Not Quite

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.

 
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Breadth Not Improving

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

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Ready for the Rally

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

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Consolidation Possible

The ratio between S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX) is giving a small warning sign that, at the least, we’ll see some sideways consolidation over the next few weeks. As you can see from the chart below, a dip below the 20 week moving average generally results in consolidation. It often precedes pull backs of 5% to 15%. The reason it occurs is that “smaller” big cap stocks are being sold as money is being moved into mega cap stocks. It takes more money to push a mega cap stock higher than it does to push a “smaller” large cap stock higher. It also takes less selling to drive the smaller stocks lower. Thus, mere rotation from large to mega caps creates a drag on SPX. At this point we don’t know if the rotation is just portfolio managers rebalancing or the start of a flight to safety so stay alert.   Over the past week, my core market health indicators mostly strengthened, but a few

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Bouncing Around

170210MarketHealth

The S&P 500 Index (SPX) finally broke out of its recent range and moved above 2300. That move didn’t bring a strong response from my core market health indicators. Instead, they bounced around this week. They’re all still positive, but some of them are showing weakness that could turn them negative without a continued rally. An example of an indicator that is barely holding on is the ratio between the SPX equal weight index (SPXEW) and SPX. When this indicator is below its 20 week moving average it tells us that money is moving into mega cap stocks (which is often a flight to safety). Healthy markets have broad based buying of the stocks in the S&P 500 Index. Right now, we’re seeing a slight increase, but not the strong move higher generally associated with big rallies.   Conclusion All the indicators are still positive, but could quickly move lower if the market doesn’t continue to rally. This is a time to keep a close eye on the market.

 
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Widespread Buying

170106spxew

Since the US election in November, the market has had broad participation as evidenced by a strong relationship between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). During the month of December, however, SPXEW didn’t keep up with SPX. The ratio between the two fell sharply as both small and large cap stocks stalled, while at the same time mega cap stocks gained support. Now, the ratio is turning back up in an apparent resumption of the widespread buying. We can dig a little deeper into what stocks are getting the most attention by looking at the most bullish stocks on Twitter over the last two months, one month, and one week. Since the US election the most bullish stocks are across several industries. During December, the list gravitated toward more technology and health care. Over the past week, the list is once again widening in the number of industries listed. This is a condition we want to see going forward as evidence of widespread

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Danger Signs

161028MarketHealth

Over the past week, my core market health indicators collapsed. They are all moving quickly toward zero. Most notably, is my core measures of risk. They are very close to going negative. In addition to my core measures, breadth measures are starting to warn as well. The bullish percent index (BPSPX), which tracks the percent of stocks in the S&P 500 Index (SPX) that have bullish point and figure charts, has fallen below 60%. When this occurs the odds of a 10% decline (from current levels) increases substantially. Especially if my market risk indicator signals. Currently, two of four components of that indicator are warning. However, the other two are a long way away from a signal. I suspect it would take a quick fall through 2100 on SPX to create a warning. Another breadth indicator that is warning is the percent of stocks in SPX that are below their 200 day moving average. It is also below 60%. I’m sure you’ve all noticed that small cap stocks have broken

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Another Try

160923spxew

Last week, I highlighted the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). In that post I mentioned that a move below its 20 week moving average usually means a choppy market as money moves out of large cap stocks and into mega caps. This week, the ratio recovered. That suggests that SPX will make another attempt at a new high. Keep an eye on this indicator because a move back below the line should signal a failure and suggest we’re headed back to a choppy market at the least. My core market health indicators bounced around a bit, but my measures of market strength and quality fell further. This isn’t a good sign during a small consolidation. I prefer to see them strengthen. Conclusion Weakness in my core indicators, but strength in the ratio between SPXEW and SPX. It feels like the market wants to make another attempt at new highs, but doesn’t have the technical underpinnings to succeed.

 
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Choppy Market Ahead

160916SPXEW

Over the past few weeks the market has shown some rotation out of big cap stocks and into mega cap stocks. When this occurs it generally causes choppy sideways consolidation, at the least, or a short term top with a modest consolidation (5% to 15%). I like to use a dip below the 20 week moving average in the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 index (SPX) as a warning sign. This week, we’ve got that warning so we should expect a choppy market ahead. Only time will tell if this is normal rotation or a flight to safety so keep an eye on this indicator over the next few weeks. My core market health indicators showed weakness this week too, with the exception of market quality. It managed to improve which is a minor hint that the rotation we’re seeing is more likely profit taking and re-positioning rather than a flight to quality/safety. Conclusion It looks like we should expect some choppy

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Broad Participation

160819NYAD

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.

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