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by Chris Puplava

The markets broke out this week to new highs after consolidating since late October. The S&P 500 is now two points away from hitting 1800, the Dow Jones Industrial Average is closing in on 16K, and the NASDAQ close to hitting 4K.

The market's health has improved as former laggards like financials and consumer staples, which were slowing the market down, are now participating as breadth begins to expand. The next laggard that appears to be turning the corner is energy, which has steadily been improving and received a much needed boost on Buffett's roughly 40 million share purchase of Exxon Mobil (NYSE:XOM) for roughly $3.5B.

With the laggards now participating it is no surprise to see the markets hitting new highs, though with sentiment elevated there may not be that much more upside before some much needed digestion of overbought conditions takes place.

S&P 500 Member Trend Strength

As shown below, the long-term outlook for the S&P 500 is clearly bullish as 84.4% of the 500 stocks in the index have bullish long-term trends. The market's intermediate-term outlook has also improved, jumping from 50.4% a month ago to 83.2%, pushing it deep into bullish territory. The market's short-term outlook also remains in bullish territory at a reading of 72.8% this week. What is most important is the market's strong long-term outlook, which still does not suggest a market top is forming.

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* 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 84% of stocks in the S&P 500 with rising 200d SMAs and 85% of stocks above their 200d SMA. Also, all ten sectors are in long-term bullish territory with more than 60% of their members having rising 200d SMAs.

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Source: Bloomberg

S&P 500 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. The daily MACD for the S&P 500 went on a buy signal this week as now all three time frames show a buy signal.


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 slipped to 55.0%, down from a reading of 77% two weeks ago, which puts it in neutral-bearish territory.

The intermediate momentum of the market continued to improve from last week's 63% reading to this week's 67% reading, with the market's intermediate momentum now comfortably in bullish territory. The market's long-term momentum remains solid at a strong 79% this week, putting it well into bullish territory.

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Source: Bloomberg

While it is encouraging to see the market's long-term momentum remains in bullish territory, the market's weekly momentum had been diverging with the S&P 500's advance with a series of lower highs. The weekly numbers have finally broken the string of lower highs on rallies as the current reading breached the highs seen in August. One of the biggest causes for the negative divergence in weekly MACD's with the S&P 500's price was the weakness in financials and consumer staples, which make up nearly a fourth of the stocks in the S&P 500. The rally that has occurred in these sectors has caused the overall market breadth of the S&P 500 to broaden out and break the string of lower highs and also caused the monthly MACD readings to stabilize.

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Source: Bloomberg

52-Week Highs and Lows Data

The insightful Lowry Research Corporation conducted a study on market tops recently in which they looked at all major market tops since the Great Depression and found selectivity is a hallmark of all market tops, in which participation in the bull market fades as individual stocks enter their own private bear markets well before the market peaks. They found that, on average, 17.26% of stocks were at or within 2% of their 52-week highs on the day the market peaked, while 22.26% were off by 20% or more from their highs, indicating more stocks were experiencing bear markets than were participating in rallying to new highs. For this reason, a look at 52-week breadth of the markets is helpful in detecting an approaching bull market top.

The market continues to display impressive internals and does not suggest a market in danger of rolling over into a bear market. For example, there are 32% of stocks within the S&P 1500 that are within 2% of their 52-week highs while only 11% are experiencing bear markets, a comfortable margin relative to the average found by Lowry Research. The S&P 500 (large caps) shows the strongest margin between those near new highs (43%) and those in bear markets (6%) with the S&P 600 (small caps) showing the weakest margin between those near new highs (24%) and those in bear markets (16%), as those in bear markets outnumber those near new highs.

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Source: Bloomberg

The current market leaders are industrials, health care, materials, financials, and technology as these sectors have the highest percentage of members within their group that are within 2% of a new 52-week high and very few members who are currently experiencing a bear market (20% + decline), if any new 52-week lows. This is bullish as four of the top five sectors are cyclical stocks that tend to peak ahead of the market, and the fact that these are the strongest sectors is encouraging.

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Source: Bloomberg

Market Indicator Summary

Below is a multi-indicator chart of the S&P 500 that measures breadth and momentum. The second, third, and fourth panels show the market had reached overbought territory two weeks ago but merely reset at neutral levels before the market continued its advance. Given that levels are not quite at bullish extremes the market has the potential to head higher into next week before another short-term top materializes.

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Source: Bloomberg

Summary

The market's trend and momentum remain firmly in bullish territory and the strength of breadth levels indicate a market nowhere close to forming a bull market top as financials and consumer staples are participating in the market's rally once again. Currently the market is just above neutral levels and may head higher into next week, but I would still be a little cautious given we aren't that far off from overbought conditions and that sentiment remains elevated ("Sentiment Levels May Pose Headwind for Markets").

Source: Market's Bill Of Health: Market Rally Broadens Out As Financials And Consumer Staples Join The Party