Market's Bill of Health: Outlook Continues to Improves

December 12th, 2012

by Chris Puplava

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The rally over the last week has modestly improved the S&P 500's long term trend from neutral-bearish to neutral-bullish as nearly 60% of the 500 members within the S&P 500 have rising long term moving averages. The greatest improvement over the last few weeks has been seen in the short term outlook which is deep within bullish territory as more than 80% of the S&P 500 members have rising short term moving averages. Given that the S&P 500's short-term momentum remains strong (see MACD section below), we are likely to continue to see further improvement in the market's short term and intermediate term trends.

S&P 500 Trend Strength


* Note: Numbers reflect the percentage of members with rising moving averages, 200d MA is used for long term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short term outlook.

200 Day Moving Average Evaluation – Long Term Trend Determination

As shown in the table below, the net percentage of stocks that are in long term bullish trends as evidenced by rising above their 200d moving average increased to 70%. In terms of sectors, the ones showing the worst market breadth continue to be utilities (45%), technology (59%), and energy (60%). The industrial sector is leading the pack with 83% of its members above their 200d MAs followed closely by the defensive consumer staples and health care sectors, each with 81% of their members above their 200d MAs.

50 Day Moving Average Evaluation – Intermediate Term Trend Determination

Like the 200d MA survey above, the percentage of stocks above their 50d MAs has risen north of 70% as the intermediate picture continue to improve. Like the 200d MA survey, the industrial sector takes the top spot with 90% of its members above their 50d MAs. However, unlike the 200d MA survey we see that the technology sector is not at the bottom of the pack, but rather has 84% of its members above their 50d MAs. This improvement in technology's intermediate picture may be hinting that the sector may be beat up enough and that its longer term trend may be improving as well.

Market Momentum

The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 500's momentum, on a daily, weekly, and monthly basis for short, intermediate, and long term momentum evaluation. As seen below, the market has considerable short term momentum as 81% of the 500 stocks within the S&P 500 have daily MACD BUY signals. A high reading like this was last seen after this summer lows, and the thrust seen over the last month is now turning the tide for the market's intermediate and long term momentum as well, while both time frames still remain in neutral territory (40-60%).

As seen in the figure below, if the market heads higher while the daily MACD % BUYS begins to make a series of lower highs, the market will likely be putting in its next top. However, short term momentum remains strong and we are more likely heading higher than lower at this junction.

52-Week Highs and Lows Data

We have a well represented market rally that is not being skewed by any one sector. For example, over the last five days the top group with the most 52-week highs is the consumer staples sector while the cyclical materials, technology, and consumer discretionary sectors are not far behind. The only sectors really absent of late are the defensive utility and telecom sectors which likely got hit from fears over higher dividend tax rates and fiscal cliff uncertainty with taxes overall.

Sector Rotation

Below is the relative rotation graph from Bloomberg that shows both the relative momentum and relative performance of assets versus a benchmark. Numbers north of 100 show improving relative momentum while numbers below show weakening relative momentum to the benchmark, and numbers to the right of 100 show outperforming assets and to the left underperforming assets.

While all three surveys above show the utility sector near the worst in terms of bullish breadth trends, the relative momentum of the sector has improved and may indicate their relative underperformance may be coming to an end. Evidence of this is seen by the sharp vertical move by the utility sector ETF (XLU) which is helping the sector move from the "Lagging" quadrant (lower left) to the "Improving" quadrant (upper left). Another shift is the improvement in the industrial sector ETF (XLI) which is further along in terms of sector rotation as it has moved from the "Improving" quadrant (upper left) to the "Leading" quadrant (upper right). The strength in the sector is also being confirmed by the three surveys above which are showing that the industrial sector is becoming a market leader.

Summary

Over the past month there have been many calls for a coming recession and bear market but the data above does not appear to be supporting this notion as defensive groups are lagging and cyclical groups are leading, not what you would expect heading into an economic contraction. For example, the basic materials and industrial groups are showing some of the strongest breadth and are on the verge of becoming market leaders, while at the same time the absolutely most horridly looking sector, utilities, is showing the worst breadth. When making a recession or bear market call, it is usually best to take a "weight of the evidence" approach rather than relying on any one indicator.

Currently the markets short term momentum remains strong and will take sometime to dissipate, and thus it is likely the market's short and intermediate trends will likely continue to improve in the days ahead.


Originally posted at Financial Sense

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