E Tops Are No Less A Process Than Bottoms

Alright folks, let's get this party started! It's hard to suggest anything bad, poor or plain ole crappy took place in the markets last week, given most everything finished higher and with certain of the major indices finishing at record highs. Take a gander at the following chart from Charlie Bilello and suggest anything to the contrary of what I stated, go ahead; I dare you!

  • S&P 500: All-Time High (above 3,100 for first time)
  • Dow: All-Time High (above 28,000 for first time)
  • Nasdaq: All-Time High
  • Wilshire 5000: All-Time High

In keeping with the theme that it is a good idea to review ALL of the data, an investor should not underestimate the signal that global stocks are sending. It is a significant event when all the markets around the world are rising, and it means that the strength in the U.S. market is not alone. It is a powerful sentiment and statement that markets are sending, so don't overlook or discount it, in my opinion.

When we strip away all of the rhetoric, the worries, complaints, and questions, the current bull market has followed in the footsteps of many others. It shows resilience and presents a picture that strength begets more strength. Bull markets don't wither away and die on the vine because they have been around too long. Instead, they will eventually reach a crescendo. The boom if you will before there is any bust. It is similar to the economic cycle.

But what about market breadth/internals. Unlike the last couple of weeks, most breadth/internals turned higher, retracing prior weeks' losses and further confirming the strength of the bull market. What do I really like about what we're seeing in breadth or MOMENTUM, as I might prefer more recently? Well, I'll "tell ya what I like, what I really really like" (Spice Girls, more to come). As I discussed in the previous week, the MACD turn higher from late July gave us increasing confidence in the bull market to continue beyond July. Even though this confidence was tested with a pullback in the S&P 500 for August, MACD combined with the general macro-fundamentals proved the bull market thesis was in-tact. So now let's look at the S&P 500 chart combined with the MACD at the bottom of the chart

The two lines in the MACD momentum are hard to see from this depiction above, so let me narrow it in to identify the really happy place in the forecast for the S&P 500. With this past week's record closing Friday action, we see that the MACD (purple) has remained above the signal (orange) and is starting to separate from the signal line once again, a net positive for bulls longer-term. But this is also something that happens ahead of market exhaustion and a subsequent rest/drawdown in the market. So just be aware and know any drawdown is what, that's right; it is a buying opportunity.

And since we're talking about MOMENTUM and long-term vision, it's important to keep in mind that we may very well be within an entirely new bull market. Of course, this will take the shape of fact or opinion depending on whom you ask. Recall that the S&P 500 peak to trough decline in Q4 2018 was 19.8%, with a formal definition of a bear market constituting at least a 20% peak to trough decline. Are we really going to mince definitions by .2% to suggest that wasn't a technical bear market? Again, it depends on whom you ask? Even so, since early 2018 or 18 months, the bull market did little to nothing and unless you count digesting gains. The market had been in a sideways, choppy, consolidating pattern until October's breakout, as shown in the following chart by Ciovacco Capital:

The S&P 500 had tested its 200-WMA back in December 2018. It proved a successful test for which the 2019 rally might seem overdone but has historically provided investors with significant gains out some 5 years, when combined with a MACD turn higher.

While the long-term signals suggest the probable returns are favorable, investors should recognize that history does not always repeat and anything is probable. We do ourselves a disservice when we work against the probabilities, but we also do ourselves a greater disservice if we wholly rely on historic market performance. In many ways, this bull market is unlike that of past bull markets. As such, we should at least expect certain outcomes to differ from the past.

Internals, internals, internals, breadth, breadth, breadth... so let's check it out! The S&P 500 RSI (Relative Strength Index) moderated higher on the week, which is a net positive for momentum, but it's also nearing a peak level. More importantly, is participation when it comes to breadth. For this, we take a look at the percentage of stocks trading above their respective moving averages. Firstly let's take at the percentage of stocks trading above their 50-DMA and then their 20-DMA.

With an end-of-week reading of 70.30, the percentage of stocks trading above their 50-DMA moved nicely higher WoW from 65. Now let's take a gander at the percentage of stocks trading above their 20-DMA. You can probably guess that this breadth indicator also moved higher on the week.

Exactamundo! The percentage of stocks trading above their 20-DMA moved up from roughly 66 in the previous week to slightly above 69 this past trading week. And yes, I could quite literally blow through 30 other breadth indicators/internals to largely come across the same thing, improving breadth that coincides with a strong strong weekly gain of .9% for the S&P 500. The bigger takeaway at this point is simply to look back at the previous weakening of breadth to suggest the following:

  • Market breadth/internals are something we should study and define for probabilities going forward
  • However, breadth can shift with headlines in either direction, just like the overall market itself
  • Approaching or achieved record highs demand a study of breadth in order to confirm or deny a rally/bullish trend to new highs.
  • At the end of the day, our longer-term internals/momentum indicators are priority i.e. S&P 500 200-WMA, NYSE A/D Line and MACD

So why don't we take a look at the NYSE A/D (advance/decline) line against the S&P 500. The chart below does show some divergence, although it's nothing to be alarmed about. The steady, new NYSE A/D line highs over the last several months have foreshadowed new highs in the S&P 500, something I talked about in previous Research Reports. (S&P 500 top chart, NYSE A/D line bottom chart)

Taking the NYSE A/D line and pairing it with the S&P 500 new highs minus new lows is a net negative at the moment and to end the prior trading week. I think what the two generally identify is a bit of market exhaustion ahead. But if the geopolitical headlines have anything to say about it, as they usually do... (SPX new highs minus new lows declined from 62 to 57 this past week).

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