E The Bulls Push To 3,000 Is Breadth-Y

For the year, the S&P 500 is down just 8.5%, but 12.7% below its all-time closing high set in mid-February of this year. Looking at the big picture in price action, the S&P 500 continues to print greater relief rally highs but remains in a 6-week long trading range with the low being 2,727 on April 21st and the high being 2,980 on May 20th this past trading week. (This is an abridged version of our weekly, full-scale Research Report at finomgroup.com)

At the sector level, we can see what drove the S&P 500 by way of the index ETF (SPY). If thought tech continued to lead, you would have been mistaken.

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We keep hearing a good deal about the defensive positioning in the market of late, but that has largely proven the case during week's when the market is down. According to the sector performance chart above for this past week, cyclical proved the sought after stocks/sectors. In fact, for all the concerns over Industrial Production data, the Industrials (XLI) lead the market this past week. The worst performers were the defensive sectors of the market like Health Care (XLV), Consumer Staples (XLP), Utilities (XLU), and even Technology (XLK) underperformed.

When markets are in rally mode, cyclical and growth stocks are in favor, but as noted above, safety sectors come in favor when markets have been in retreat as they were 2 weeks ago. (Sector performance 2 weeks ago, chart below)

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All Things S&P 500 Related

After an impressively strong start to the week, where equities opened higher and kept going from there, turnaround Tuesday showed up once again with a reversal off the highs of the day. The reversal was headline-driven, of course. Those headlines came from the STAT News and basically suggested that Moderna said, “much to do about nothing” and didn’t actually publish any results that could be discerned or validated.

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While STAT News simply critiqued Moderna's early data related to the phase 1 human trials, the market remains uneasy about the path forward and algorithms remained tuned to key words in the headlines. Nonetheless, the dampening sentiment of Moderna's positive data proved short-lived and by the end of the week both Scott Gottlieb and Dr. Anthony Fauci stood tall and in favor of Moderna's favorable data.

"Dr. Anthony Fauci expressed "cautious optimism" Friday about the initial results from a coronavirus vaccine trial, which were widely celebrated this week, and said it remains "conceivable" that a vaccine for the deadly pathogen could be available by the end of the year.

"The vaccine induced what we call neutralizing antibodies, as opposed to just binding antibodies, and neutralizing antibodies are antibodies that actually can block the virus. The results were "even better than we thought,and they did it at a moderate dose of the vaccine."

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Fauci said full results would be submitted to a peer-reviewed journal, most likely within a few weeks. If all goes according to plan, Fauci said it is possible that a vaccine could be available within a matter of months, a timeline that would shatter the years-long process typically required to produce a vaccine.

"I think it is conceivable if we don't run into things that are, as they say, unanticipated setbacks, that we could have a vaccine that we could be beginning to deploy at the end of this calendar year, December 2020 or into January 2021." 

Due to the headline-driven nature of the market and the sentiment tied to medical advancement delivering a vaccine to eradicate the fears surrounding COVID-19, it will remain an important discipline to follow the news flow regarding this subject matter. While the delivery and inoculation timelines are likely to shift, I'm of the opinion science will prove triumphant and fears surrounding the reopening of the economy will dissipate over the coming months.

The tight trading range over the last 6 weeks has presented a reasonably strong trader's environment but ultimately the market will demand a breakout to the upside or a breakdown, expressing a correction. A correction would be welcomed by many investors given what appears lofty market valuations historically. With that being said, let's go to the charts... First, recall from last week the following insights regarding the S&P 500:

(Click on image to enlarge)

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"Since we recognize market structure is top-heavy, the chart above asks for investors to consider, “What if it weren’t”. For Finom Group newcomers and those unfamiliar with the S&P 500’s structure, understand that it is “market cap-weighted“. It is not an index that represents each stock within the index as being equal. As such, an index ETF has been created to resemble if it were. We can utilize this equal-weight ETF to compare relative strength with the Cap-weighted S&P 500 itself. In doing so, we can decipher the true strength or weakness of the overall index, not just the top handful of stocks with the largest market caps.

As shown in the chart above (SPXEW:SPX), this comparison identifies how weak stocks are underneath those top-weightings within the S&P 500. In fact, the SPXEW:SPX put in a new all-time low on Thursday. Don’t let the market rally off of the bottom in March, the performance through April and the recent run back to the 61.8% Fibonacci level fool you into thinking the market rally is healthy. If I was to characterize it, based on the SPXEW or the Equal-Weight index ETF (RSP), I would say it is better than awful, but not good enough to push my sentiment from cautiously optimistic to full-on bullish."

What we want to see is broader market breadth during up moves in the market. Is that what we got with the S&P 500 advancing 3.2% this past week?

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As we can see from the chart above, indeed, that is exactly what we saw during the upward trend this past week. The cap-weighted SPY rallied 3.2% while the equal-weighted RSP rallied 5.5% on the week.

Not only did equal-weight lead the cap-weight S&P 500, but small-caps lead large-caps this past week. This is something we also want to see as a signal post suggesting this is not just another bear market rally. While the Nasdaq (NDX) led the major large-cap indices higher during the week, the Russell 2000 (RUT), otherwise known as the small-cap index, led all major averages with a 7.84% advance on the week. At the index and/or sector ETF level, small-cap ETFs carried that breadth as well. Keep this in mind, KEEP THIS in mind, KEEP THIS IN MIND!!

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Industrials, small-cap and equal-weighted ETFs leading are the tell-tale signs of risk-on appetite and indicative of something more than just your average bear market rally. But, we do have to recognize a week does not make a trend, right?

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The table above denoted the index moves since the 52-week low on March 23rd. The Russell 2000 slightly edged out the Nasdaq with the largest percentage gain off of the lows. With last week's performance, the Russell has increased its performance gap for the better when compared to the Nasdaq. In fact, over the last 30 days, the RUT is up nearly 13% while the NDX is up nearly 9 percent.

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While this is a bear market rally it is only one in name as it carries all the characteristics of a bull market presently. Beyond the index level performances since the March lows and that from what we've seen in the way of equal vs. cap-weighted performance, we also continue to review the sectors most heavily correlated with the consumer.

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xly to xlp consumer stocks ratio performance analysis chart coronavirus stock market crash_may 21

The TOP panel shows the ratio of the XLY (Consumer Discretionary Sector SPDR) versus the XLP (Consumer Staples). The ratio is relatively flat with Consumer Discretionary (travel, hotel, retail) and Consumer Staples (beverages, personal products) essentially in line. They were moving in a similar pattern in the 4th quarter of last year, and slightly accelerated into the market high in February. After that, the ratio took a downturn. But recently...

  • The ratio rallied and put in a higher low the first week of April, and since then has continued higher.
  • The last couple days this ratio has gone to a new swing high above its February high, which illustrates a rotation back to traditional offense.
  • But there's more!

The BOTTOM panel shows the same ratio of Consumer Discretionary vs Consumer Staples, but it’s using the equal-weighted version. RCD is an equal-weighted Consumer Discretionary ETF, and RHS is an equal-weighted Consumer Staples ETF. Until the March low, both ratios were pretty similar.

  • They both broke down through their most recent swing lows, although you’ll notice the equal-weighted version actually broke down first.
  • In mid-February, the equal-weighted version was already rolling over while the cap-weighted version was still above its low from January.
  • This happens more often than not, where the equal-weighted version tends to lead and signals first.
  • Equal-weighted chart identifies a series of higher lows, but not quite yet higher highs. It does appear we are on the cusp of that happening.
  • Recent swing high was $84.99. Closed $83.20 on Friday this past week.

Right now while the cap-weighted version is going to new highs for 2020, the equal-weighted version is nowhere near its peak from the beginning of the year. This is because of the outsized weight within the Consumer Discretionary ETF of a couple mega-cap names.

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Names like Amazon (about 25% of the ETF) and Home Depot (about 12% of the ETF) dramatically affect the value of the cap-weighted XLY. Based on the chart of the XLP/XLY, I think it's safe to say that the equal-weighted study has some work to do but has leaned bullish over the last couple of months and points in favor of the S&P 500 getting to its 200-DMA. How's that for a segue?

A new bull market would be best identified with the percentage of stocks within the S&P 500 trading above their 50-DMA hitting 85% when the S&P 500 itself was able to achieve its 200-DMA. In other words 85% above 50-DMA + SPX hitting 200-DMA = NEW BULL MARKET! And folks, that's what finds the coming week so compelling.

Throughout this bear market and self-induced pandemic causing a recession, equities have found a bottom that has still been called into question. As the economy reopens, the economic recovery will gain scrutiny in much the same manner as the market recovery has and still is found for criticisms on many fronts. With this in mind, mile marker achievements like the breadth study offered by Andrew Thrasher go a long way to improving investor sentiment and distinguishing a bear market rally that ultimately fails and finds new lows vs. a bear market rally that leads to a new bull market. So let's see where we stand with regards to the percentage of S&P 500 stocks trading above their 50-DMA and in relation to the S&P 500 which finished the week at 2,955. The 200-DMA for the benchmark index resides at 2,999, just 1.5% away.

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In order to meet the standard of a new bull market, the percent of stocks trading above their 50-DMA needs to be 85% or better. To end the week, the index achieved just over 82% of stocks. Moreover, the breadth indicator (green line) has made a higher high and successive higher low, indicating broad breadth improvement throughout the relief rally period. If we were to combine the breadth of the S&P 500 with the offensive sector participation amongst investors of late, we could suggest that the S&P 500 was poised to achieve the 200-DMA as early as the coming week and with 85% of stocks trading above their 50-DMA. There are no guarantees, but a goodly amount of the technical and breadth analysis appears to favor this outcome, barring any exogenous headlines.

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