Market's Bill Of Health - Cyclicals Retain Leadership, Breadth Levels Still Strong

by: Financial Sense

by Chris Puplava

The markets have gotten off to a rocky start this year, with the S&P 500 down the first two trading days of the year and down 0.92% year-to-date. A pause should not come as a surprise as the markets were overbought and extended entering 2014 and in much need of cooling off. What remains encouraging about this market is that overall trend and momentum breadth measures remain quite strong and the fact that the market's weakest area is the defensive sector is bullish, as typically the defensive sectors leads before major market peaks. Short-term indicators are still at elevated levels and hint that the recent pause in the market has more to go, but given the strong internals of the market we are likely to see new highs once this pullback in the market is over.

S&P 1500 Member Trend Strength

As shown below, the long-term outlook for the S&P 1500 is clearly bullish as 78.2% of the 1500 stocks in the index have bullish long-term trends. The market's intermediate-term outlook remains in bullish territory at 69.4%. The market's short-term also remains in bullish territory at a 71.2% reading. What is most important is the market's strong long-term outlook, which still does not suggest a market top is forming.

* 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 78% of stocks in the S&P 500 with rising 200d SMAs and 78.8% of stocks 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 with the sole exception being the utilities sector.

Source: Bloomberg

What you will notice in the table above is the bulk of the red cells are located in defensive sectors like utilities, telecommunications, health care, and consumer staples. However, the strongest sectors (green cells) are located in the market's most economically-sensitive sectors like industrials, technology, materials, and consumer discretionary, which bodes well for the market's and economy's outlook.

S&P 500 Market Momentum

The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 1500's momentum on a daily, weekly, and monthly basis. The daily MACD for the S&P 1500 went on a buy signal in the middle of December with the intermediate (weekly) and long-term (monthly) outlooks also on buy signals.

Source: Bloomberg

Digging into the details for the 1500 stocks within the S&P 1500, we can see that the daily momentum for the market has improved markedly to 71%, up from a reading of 20% two weeks ago, and is well back into bullish territory. The intermediate momentum of the market improved a notch as it rose from 52% two weeks ago to 56% this week, putting it in neutral-bearish territory. The market's long-term momentum remains solid at a strong 78% this week, putting it well into bullish territory and up 2% from two weeks ago.

Source: Bloomberg

52-Week Highs and Lows Data

What continues to be encouraging about the market's advance is that it is broad based. Even during this week's decline there were 103 new 52-week highs for every 1 52-week low in the S&P 1500 Composite. Regardless of market cap, as seen below, new highs continue to dominate new lows.

Source: Bloomberg

In terms of sectors, there are four that have a higher percentage of members hitting 52-week highs in the last five days than the S&P 1500, and every one of them is a cyclical sector. In particular, the industrial sector takes the top spot with 46% of its members hitting 52-week highs during the trading week. Like the trend summary above, the fact that cyclical sectors dominate the top spots while defensive sectors are at the back of the pack is a very healthy sign.

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 last week and is likely to pose a headwind until unwound. My guess is the market remains weak heading into early next week before these levels are unwound and the market can head higher.

Source: Bloomberg


The market remains very healthy and there are no major chinks in the armor as trend and momentum breadth levels remain in bullish territory. What is most encouraging is the market's most cyclical sectors remain areas of leadership while defensive sectors continue to lag. While the market is likely to continue to remain soft until short-term indicators ease off overbought levels, given the market's strong internals, a major market peak is not likely around the corner.