Craig Thompson | Apr 04, 2023 17:04
Below is a chart of the S&P 500 in the upper panel and the MACD (momentum indicator) in the lower panel. Here are my takeaways.
Price action is bullish as long as the S&P 500 is above its 200-day moving average.
Below is a chart of the S&P 500 going back to 2007. Here are my takeaways.
Despite last year’s correction, the stock market is still in a secular (long-term) bull market.
Below is a chart of the NYSE New Highs Minus New Lows in the upper panel and the S&P 500 Index in the lower panel.
This breadth indicator subtracts new lows from new highs. “New lows” is the number of stocks recording new 52-week lows. “New highs” is the number of stocks making new 52-week highs.
This indicator is a reliable long-term measure of market breadth, albeit with a small number of historical whipsaws and lags in providing signals. A move above its 50-day moving average is a bullish signal, and below a bearish one. Here are my takeaways.
Long-term market breadth looks weak.
Now let’s look at that same breadth indicator but during the last major bear market in 2008 – 2009. Notice how the indicator did a fairly good job of signaling market strength and weakness, albeit with a lag.
There were two whipsaws during that bear market which, in hindsight, proved to be false signals.
The whipsaw this year looks eerily similar to the one in the last major bear market.
Below is a chart of the S&P 500 in the upper panel and the relative strength of major market sectors in the lower panels.
I have charted the relative strength of each of these sectors relative to Consumer Staples (NYSE:XLP). I chose XLP because it is a sector that typically does relatively well during poor market environments as investors look to reduce portfolio risk. I have notated recent S&P 500 short-term bottoms and tops with vertical red and green lines for reference. Here are my takeaways.
We are not seeing broad-based relative strength in major market sectors. The lone exception is technology.
During periods of market strength, you generally see riskier assets, such as small-cap stocks, outperform.
Below is a relative strength chart in the lower panel where I compare the performance of small-cap stocks to the S&P 500 index. When the line rises, it indicates that small caps are outperforming (risk-on), and when it falls, small caps are underperforming (risk-off). Here are my takeaways.
Small caps underperformed for months prior to the January 2022 market peak. This weakness signaled internal weakness, which preceded the market’s eventual strong move lower.
Small caps started to outperform in the summer of 2022, suggesting the market was taking a more risk-on environment before the market’s October 2022 market bottom. In addition, this strength preceded a breakout in the S&P 500 above its downtrend line and 200-day moving average (not charted).
Small cap relative strength has fallen decisively below its uptrend (green) line.
Small-cap underperformance suggests a bearish risk-off environment.
As long as the S&P 500 continues to trade above its 200-day moving average, market conditions are favorable from a price perspective. However, given that most market internals have turned decidedly negative, I don’t place a lot of confidence in the market’s ability to continue to trade above this average for an extended period unless internals somehow improve.
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