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by Chris Puplava

The markets have stabilized and remain in a short trading range with the bulls and bears fighting it out. Various readings suggest we've likely seen a short-term bottom and may rally into next week; however, we haven't quite seen enough fear in the markets to suggest the corrective phase is over. What this means is we are likely to see a relief rally next week to work off an oversold condition but there remains a good chance the market will retest its recent lows and by that point fear levels should be high enough to suggest a more meaningful bottom. Given the long-term trend and momentum still remain deep in bullish territory, this is likely just a corrective phase in an ongoing bull market.

Follow the Money - Weekly ETF Flows

When looking at inflows and outflows into major exchange traded funds (ETFs), we can see this week was clearly a risk-off market which showed the largest outflows from the S&P 500 ETF (NYSEARCA:SPY) at $9.1B followed by $3.3B in outflows from the iShares Emerging Market ETF (NYSEARCA:EEM). Financials (NYSEARCA:XLF), Industrials (NYSEARCA:XLI), Junk Bond (NYSEARCA:HYG), and small cap stocks (NYSEARCA:IWM) also saw meaningful outflows and are all considered riskier areas of the market. On the flip side, inflows showed a divided market as investors went both long bonds (NYSEARCA:TLT) and short (NYSEARCA:TBT) in large amounts. There were also inflows into small cap stocks (NYSEARCA:TNA), financials (NYSEARCA:FAS) and REITS (NYSEARCA:IYR), so overall a mixed message when looking at inflows while outflows were more skewed towards a risk-off stance.

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S&P 1500 Member Trend Strength

As shown below, the long-term outlook for the S&P 1500 is clearly bullish as 75.2% of the 1500 stocks in the index have bullish long-term trends. The market's intermediate-term outlook slipped to neutral-bearish at 49.8% this week from last week's 71.6% reading. The market's short-term trend remains in bearish territory at a 30.8% reading. What we have is a short-term oversold condition with a neutral intermediate-term outlook in the context of a bullish long-term trend.


* 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 75% 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 43%.

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Source: Bloomberg

Looking at the short-term (far left columns) we can see that the consumer discretionary and telecom sectors are leading the way down but both are at levels associated with bottoms. Currently the consumer discretionary sector has only 18% of its members above their 20 day moving average while the utility sector has only 13%, 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 still on sell signals with a weekly sell signal given last 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 bombed out current reading of 18%. Readings below 20% are associated with short-term bottoms and why there is a strong chance we rally into next week.

The intermediate momentum of the market worsened as well as it fell from 56% three weeks ago to 36% this week, putting it into bearish territory and which also led to a weekly sell signal on the S&P 1500. Currently the weekly numbers are at levels we've seen with intermediate-term bottoms in the past.

The market's long-term momentum remains solid at a strong 75% this week, putting it well into bullish territory as the market's long-term momentum remains steady. The best way to read the table below is that we are both short and intermediate-term oversold in a strong bullish trend. This is what you look for to "buy the dip" in a bull market.

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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. Additionally, the weekly numbers are at levels that were associated with the last three intermediate-term market bottoms.

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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 more new 52-week highs (5.8%) than lows (3.2%) in the S&P 1500, with larger cap stocks (S&P 100, S&P 500) showing the most weakness.


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 11.8% of its members hitting new 52-week highs this year with only 1.32% seeing new lows. The telecom and energy sectors continue to lag as they saw the most new 52-week lows at 20% and 5.38% respectively.

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Source: Bloomberg

As I've highlighted often in my writings, the best way to tell when a bull market is transitioning into a bear market is looking at spikes in 52-week highs during rallies versus spikes in 52-week lows during declines. Whichever spike is greater shows who's in charge. With that in mind, when looking at the S&P 1500 over the last two years we have seen spikes in 52-week highs continue to dominate, and the near muted response in 52-week lows despite the sell-off continues to suggest this is a healthy pullback in an ongoing bull market.

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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 (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 indicators are now at levels that have marked prior short-term bottoms and suggest a rally next week.

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Source: Bloomberg

For signs of an intermediate-term low, I'd like to see us get close to 30% of S&P 500 members with a MACD above a baseline zero (5th panel below), followed by a surge in buying with % of members with a MACD buy signal over the prior 10 days surge over 15%. Until we see strong buying, any bounce should be considered a dead cat bounce.


Source: Bloomberg

During this decline the VIX has spiked towards levels associated with bottoms over the last year, however, put/call data is still not showing high levels of fear seen at market bottoms. Along with the above, this suggests a possible rally next week to work off an oversold condition before we retest the lows and make another significant bottom.

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Source: Bloomberg

Summary

The most important take away from this report is that the long-term trend and momentum of the market remain deep in bullish territory so talk of a bear market is highly premature, particularly given that spikes in new 52-week highs have been dominating spikes in new lows during declines. What we have is a corrective move in an ongoing bull market and we now have to decide when the bottom is in. Short-term indicators suggest the market rallies next week as we've hit levels associated with short-term lows, but a lack of fear in put-call data and a lack of strong buying suggests we may have a weak rally attempt into next week followed by a retest of the current lows to bring about more fear and anxiety associated with major bottoms.

Disclosure: No positions

Source: Market's Bill Of Health - Expect Short-Term Rally Before Final Correction