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by Chris Puplava

The markets have gotten off to a rocky start this year with the S&P 500 down more than 3% year-to-date and the Dow Industrials down more than 4%. Such weakness is not surprising given how bullish and overbought the market was entering 2014. While we have worked off some of the market's overly bullish sentiment and overbought readings, we likely have more to go with a short-term bottom expected next week as many indicators are two thirds of the way to hitting buy zones.

S&P 1500 Member Trend Strength

As shown below, the long-term outlook for the S&P 1500 is clearly bullish as 78.4% of the 1500 stocks in the index have bullish long-term trends. The market's intermediate-term outlook remains in bullish territory at 71.6%. The market's short-term also remains in bullish territory at a 65.0% 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 1500 with rising 200d SMAs and 72% 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 utility sector the only one with a reading below 60% at 46%.

(click to enlarge)
Source: Bloomberg

Looking at the short-term (far left columns) we can see that the consumer discretionary and material sectors are leading the way down but both are at levels associated with bottoms. Currently the consumer discretionary sector has only 14% of its members above their 20 day moving average while the materials sector has only 17%, with readings below 20% often marking bottoms.

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 and weekly MACD for the S&P 1500 are on sell signals with a weekly sell signal given this week as short-term momentum loss has turned into medium-term momentum loss. However, the monthly buy signal given in early 2012 remains in force as the market's long-term momentum remains solid.


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 deteriorated sharply from a reading of 71% a few weeks ago to the current 46% reading. The intermediate momentum of the market worsened as well as it fell from 56% two weeks ago to 42% this week, putting it in neutral-bearish territory and caused a weekly sell signal on the S&P 1500.

The market's long-term momentum remains solid at a strong 77% this week, putting it well into bullish territory as the market's long-term momentum remains steady.


Source: Bloomberg

As highlighted in past reports, it was concerning to see the market heading higher while the percentage of members with weekly MACD buy signals fell, and why I felt weakness lay ahead. With the pullback well underway and weekly readings falling further, it is very encouraging to see monthly numbers holding steady near 80% and at the high end of the range over the last two years. It is the fact that monthly numbers remain bullish that I feel this is just a healthy pause in the markets.

52-Week Highs and Lows Data

What continues to be encouraging about the market's advance is that it is broad based, as even during this week's decline there were 12.5 new 52-week highs for every 52-week low in the S&P 1500 Composite. Regardless of market cap, as seen below new highs continue to dominate new lows.

(click to enlarge)
Source: Bloomberg

In terms of sectors, health care continues to be a market leader in 2014 while many former leaders last year like consumer discretionary or financials fall behind the S&P 1500. Health care is well in the lead with 37.7% of its members hitting new 52-week highs this year with only 0.65% seeing new lows. The utility and energy sectors continue to lag as they saw only 1.6% and 6.5% of their members hitting new 52-week highs this week respectively.

(click to enlarge)
Source: Bloomberg

Market Indicator Summary

Below is a multi-indicator chart of the S&P 500 that measures breadth and momentum (that we highlighted two weeks ago) and said that given the indicators were just coming off their highs the market would likely remain weak. With the market's decline this week, several are roughly two thirds of the way towards intermediate lows as highlighted by the second, third, and fifth panels with an intermediate low likely next week.

(click to enlarge)
Source: Bloomberg

Outside of the above indicators I am also watching other markets for clues of a bottom. The Yen has been a great leading indicator for the stock market and its tops and bottoms have led the market for more than a year. The Yen began to strengthen ahead of the market weakness and continues to decline, and why I think the market's weakness spills over into this week. If the Yen begins to weaken relative to the USD, that will be a sign liquidity is returning to the market and a bottom may be near.

(click to enlarge)
Source: Bloomberg

I will also be monitoring the credit markets as they tend to lead the stock market. If junk bond spreads (red line below and inverted) begin to stabilize and if currency swaps (USD swap in green and inverted) begin to ease, a bottom will likely be near.

(click to enlarge)
Source: Bloomberg

Summary

The market remains very healthy as there are no major chinks in the armor as long-term trend and momentum breadth levels remain in bullish territory. 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. For signs of a market bottom I'd look towards the consumer discretionary and materials sectors as they've led on the downside. If they begin to stabilize and outperform the market, that may be the early sign that this market is bottoming.

Source: Market's Bill Of Health: Weakness Likely To Spill Over Into This Week, Though Short-Term Bottom Near