Market's Bill of Health

July 27th, 2013

by Chris Puplava

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The markets stalled this week and essentially traded sideways leading to a loss in short-term momentum; intermediate and long-term momentum still remain strong, however, along with the market's overall trend higher. We should expect to see some movement next week with the July jobs report on Friday, the FOMC meeting on Wednesday, and the ISM Manufacturing PMI on Thursday for July's data, all of which will likely push the market out from its near-term consolidation.

S&P 500 Member Trend Strength

As shown below, the outlook for the S&P 500 is clearly bullish as 87.4% (or 437) of the 500 stocks in the index have bullish long-term trends. The market's intermediate outlook is back in bullish territory at a reading of 66.8% and the market's short term outlook has also moved back into bullish territory at a strong 92.4% reading.

S&P 500 Trend Strength

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

The most important section of the table below is the 200d SMA column which sheds light on the market's long-term health. As seen in the far right columns, you have 87% of stocks in the S&P 500 with rising 200d SMAs and 86.8% of its members above their 200d SMA. Also, nine out of ten sectors are in long-term bullish territory with more than 60% of their members having rising 200d SMAs.

Source: Bloomberg

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. As seen in the table below, the momentum for the S&P 500 is bullish with a current BUY signal in each time frame.

Source: Bloomberg

Digging into the details for the 500 stocks within the S&P 500 we can see that the daily momentum for the market has improved greatly, jumping from only 9% of members on daily BUY signals on June 7th to this week's reading of 61%; though down off the high reading of 88% from last week.

The intermediate momentum of the market improved slightly from last week by 1% to the current 55% this week, just shy of moving into bullish territory (60%+).

The market's long-term momentum remains solid at a strong 85%, indicating this bull market remains healthy and strong; and what is encouraging is the steady improvement in the market's long-term momentum since last summer.

Source: Bloomberg

The strong surge in daily MACD buy signals reached well above the 80% threshold last week, which often signals the market has reached escape velocity and enough momentum has been built to end a correction. We saw this after the summer 2012 and November correction last year, though what is a little concerning is that the market's recent peaks have been associated with fewer stocks on weekly MACD buy signals (red declining arrow), which could be foreshadowing a deeper correction on the horizon unless the weekly MACD buy signals pick up. Regardless of any future corrections, unless the monthly MACD buy signals weaken, the probability of a bull market top remains low.

Source: Bloomberg

52-Week Highs and Lows Data

What continues to be encouraging about the market's advance is that it is broad based as more than one third of the entire S&P 500 has reached a new 52-week high during the week. What is even more significant is that economically-sensitive sectors are leading the charge higher as financials and industrials are two of the top three sectors with the most new highs.

Source: Bloomberg

Summary

While the market correction that began on May 22nd is over, it has been consolidating ahead of a busy reporting week filled with some potential market-moving events. Though short-term momentum has weakened with the recent consolidation, the market's long-term momentum continues to remain strong and indicates the risk of a bull market top remains remote. That said, the biggest red flag currently is the divergence in weekly MACD buy signals as subsequent peaks have trended lower. This divergence may foreshadow a market correction in the weeks ahead or it may simply indicate a high degree of sector rotation. If we see the cyclical sectors of the market weaken in the trend, MACD, and 52-week high segments highlighted above, that would tend to suggest the weakening readings in weekly MACD buy signals is in fact suggesting a market correction coming rather than sector rotation. Even if we do get a correction ahead it is likely to prove fleeting and not signal a bull market top as the market's long term trend and momentum readings are very strong, not something associated with major market tops.

On a related note, many market commentators have been pointing out how NYSE margin debt is currently reaching levels associated with the 2000 and 2007 market tops. Although this presents some alarm on an absolute basis, a better use of this indicator in signaling a major market top may be found when viewed relative to US GDP, which is a common way of measuring financial leverage. As you can see below, this has served as an early warning indicator for the two prior tops in the stock market once exceeding levels on the S&P (black line). Relative to current US GDP, however, margin debt (red line) still has further to go. If you are interested in hearing more about this, Ryan Puplava will be explaining this chart and other market-related topics on this weekend's Financial Sense Newshour.


Originally posted at Financial Sense

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