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Do Not Get Caught In Short-Term Bullishness

|Includes: SPDR Dow Jones Industrial Average ETF (DIA), QQQ, SPY
Summary

Long-term Market Breadth numbers.

Short-term market Breadth sentiment.

Breadth, volume and volatility charts.

next week outlook.

The market ended the week on positive Friday's rally which pushed the major market indexes from red into green for a week. Despite the positive week, the long-term market Breadth did not strengthened:

66% of the S&P 500 index listed stocks are bullish - down by 1% from a week ago - Bullish sentiment;
70% of the DJI index listed stocks are bullish - down by 6% from a week ago - Bullish sentiment;
76% of the NASDAQ 100 index listed stocks are bullish - up by 2% from a week ago - Bullish sentiment;
53% of the Russell 2000 index listed stocks are bullish - unchanged from a week ago - Weak Bullish sentiment;
48% of the NYSE index listed stocks are bullish - up by 1% from a week ago - Weak Bearish sentiment.
Source: High-Low Breadth chart

The Nasdaq 100 index (QQQ) is the only one from the major five that demonstrated an increase in the number of the Bullish stocks. DJI (DIA) and S&P 500 (SPY) indexes, on the other hand, despite positive week, show drop in the number of the Bullish stocks. The Breadth numbers on the Russell 2000 and NYSE Composite indexes remained basically unchanged.

We continue seeing the increasing gap between the Large Cap and Small Cap market sectors. The market indexes moved up because the investors are pushing up the Large Cap stocks. This is not a normal when the majority of stocks are traded down or side-way and just a few high-weighted stocks hold the market indexes at the top. It could end OK if these high weighted stocks will hold the market flat long enough while the uncertainty calms down among the rest of the stocks. However, it very sensitive and unstable condition when markets depends on a few stocks. Should anything negative touch these stocks, we may run into another strong correction. The investors already saw that the market may lose 6% easily in a single session - there are a lot of Bears are waiting for the right moment to jump in.

The most negative Breadth signal is the dominance of the Bearish stocks on the NYSE Composite index. For as long as we see the number of the NYSE bearish stock dominating the Bullish stocks, the overall, long-term market Breadth sentiment will be considered Bearish. By saying that, we do not state that the market will crash next week. It means that the Bull market is over or it "took a vacation" at least. It mean that we may see strong corrections and these corrections may grown into a recession or a crash.

For the coming week, we do not see a lot of positive signals as well. As of now

335 of the S&P 500 stocks are above their 200-day MA - down by 3 from a week ago - Bullish,
313 of the S&P 500 stocks are above their 120-day MA - down by 5 from a week ago - Bullish,
247 of the S&P 500 stocks are above their 50-day MA - up by 19 from a week ago - weak Bearish
290 of the S&P 500 stocks are above their 20-day MA - up by 93 from a week ago - weak Bullish.
Source: Stock screener

We have strong increase in the number of the Bullish stocks on the 20-day MA. However, we see a drop in the number of the Bullish stocks on 200- and 120-day MA. As of now, there is a bullish momentum and we may see a continuation of the Friday's rally, however, this momentum is not strong. While we are witnessing some short-term bullish activity, it looks like the long-term Bulls are slowly leaving the market. Under such condition we cannot expect for further strong recovery. Because of that, next week market Breadth sentiment is considered only slightly in the favor of the Bulls.

it is worth mentioning about volatility. Despite the recovery, the volatility remains on high level. 14-day ATR on the S&P 500 index continue to move above 2 %. As we move further from the recent correction, the volatility may drop down, yet, we still expect it to remain above 1.8% during the next week. Under such high volatility we may see strong changes in the sentiment. If current Breadth sentiment favors the Bulls slightly, tomorrow the situation could be changed in the favor of the Bears radically.

It is normal to see an increase in volatility during a correction. It is abnormal for volatility remain high during a recovery.

Volume, is another point worth some attention. Friday's recovery (on 2/23/20180) went on low volume. On that day, the S&P 500 index had the lowest daily volume in 2018. This confirms the Breadth analysis that Friday's rally was mainly fueled by the short-term traders and retails investors. Without long-term institutional investors we cannot expect returning of the Bull market.

Overall, next week sentiment is considered slightly in the favor of the Bulls. However, the Breadth, volume and volatility indicators should be monitored on the daily basis - the sentiment may turn strongly bearish any day of the coming week.

Breadth, volume and volatility charts from https://www.marketvolume.com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.