Bob Palmerton's  Instablog

Bob Palmerton
Send Message
Mr. Palmerton has over 25 years experience in Corporate Finance, holding positions as CFO, Director of Finance, Financial Management and Analysis roles for Fortune 500 and multi-national firms (ADP, Honeywell, BOC Group) as well as early-stage growth companies. Mr. Palmerton has raised equity... More
My company:
Baseline Analytics
My blog:
Baseline Analytics
  • Stock Market Trend Indicators Remain Firmly Positive 0 comments
    May 22, 2013 7:20 AM | about stocks: SPY, DIA, XLY, XLP, LQD, TLT, IEF

    As the equity markets reach for new highs, support for the uptrend is reinforced by a series of market indicators that remain firmly bullish. Baseline Analytics categorizes these indicators into three broad components:

    1. Trend and Sentiment

    2. Breadth and Internal Strength

    3. Economic Indicators

    Here is a visual display of how these indicators are performing today.

    Trend and Sentiment. The steep uptrend in the S&P500, as seen in the chart below, is steeper for my liking and would suggest a pause at some point relatively soon. Based on the strength of the uptrend, however, a pause is more likely to be seen as a trading range market or consolidation of recent gains, rather than an outright correction. Sharp trendlines like that shown on the S&P500 chart below ultimately get broken. As for sentiment indicators, we look for extremes in VIX (such as a reading of 12 or below) and the Put/Call Ratio (such as a reading of 0.60 and below) to suggest a possible trend shift to the downside for equities. We do not see that in today's indicators, as both remain neutral.

    (click to enlarge)

    Breadth and Internal Strength. Indicators such as the NYSE Advance/Decline Ratio, New Highs vs. New Lows and the NYSE Summation Index all point solidly in the bullish direction with no divergences from equity market performance. The Summation Index is a breadth indicator based on Net Advances (advancing issues less declining issues). We look for the 400-level to mark the dividing line between an uptrend and a downtrend (the reading closed on Tuesday at 1218, nearly a new high).

    (click to enlarge)

    Finally, Baseline Analytics reviews a series of economic and industry sector indicators. LQD vs. IEF is a ratio of corporate vs. US Government bonds. As the ratio climbs, the equity markets tend to move to the upside. Copper vs. US Bonds prices, as well as the S&P500 relative to bonds, reflect economic strength and risk appetite, as rising trends tend to coincide with higher equity prices. Copper has struggled for a while; despite the pickup in housing starts, mediocre GDP growth as well as a slowdown in China GDP and manufacturing growth rates may be factors weighing on this indicator. This represents a negative divergence from the equity markets. Other indicators of economic strength and reinforcement of the "risk on" trade include the relative outperformance of Small Caps vs. Large Caps (see our recent Blog on the topic), as well as outperformance of discretionary stocks vs. staples and defensive equities.

    (click to enlarge)

    The strength of these market and economic indicators lend support to the bullish case. As most of these indicators push to new highs, caution is warranted, and a pause in the uptrend would be viewed as a welcome respite and an opportunity to join in on the rally and a favorable entry point.

    - Baseline Analytics

    Stocks: SPY, DIA, XLY, XLP, LQD, TLT, IEF
Back To Bob Palmerton's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers


More »

Latest Comments

Most Commented
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.