Weekly Technical Market Outlook 2/23/2015

It’s nice to see stocks finish on a strong note last week with traders preparing for Fed Watch 2015. While the S&P has been hitting new highs for the last several years its great to also have the other major equity indices participating as well, with the Dow Industrial, Nasdaq, Russell, and S&P 600 (small caps) all hitting multi-year highs. At a quick glance I believe one of the only major U.S. indices to still be under it’s prior high is the Dow Transports, but this index is still very close to breaking out.

In the last Technical Market Outlook I addressed the mult-month consolidation that was taking place in the S&P 500 ($SPX), noting the slight bias of higher lows that was taking place in breadth and momentum. Since then, equities have been able to break out as mentioned above and breadth has continued to confirm the advance. Momentum on the other hand remains in a bullish range but still has yet to confirm the recent new highs.

While I think the current trend looks health the short-term price action appears to be stretched at the moment. Volatility ($VIX) momentum has been pushed down quite a bit. I wouldn’t be surprised if we see some bumps in the near future that could push the $VIX higher. We’ll see.

However, of the five tools I use to gauge a market’s health at each new high, only two have yet to confirm the latest move in stocks. Most notably, the relationship between high yield bonds and Treasury debt. To put that in perspective, at the 2007 peak all five measurements diverged (did not hit a new high), in 2011 four of them did not confirm in April but since then we’ve seen a healthy number of data points show positive signs of market strength. While valuations/fundamentals appear to be stretched on a historical perspective, the price action and market itself still looks healthy on an intermediate/long-term basis.

Trend
After a two month consolidation stocks have broken out and continued their move to new highs. The up trend remains intact with the S&P 500 above both its short-term and intermediate-term moving average’s. I’ll be watching to see if price ‘respects’ the trend line connecting the higher highs since the last touch in December sent prices lower by a couple of percentage points.

Breadth
After a minor divergence at the prior high in the S&P in December, the NYSE Common Stock Only Advance-Decline Line has reached a new high, confirming the recent rise in stocks. We’ve also had a breakout in the Percentage of Stocks Above Their 200-day Moving Average. This breadth measure is still attempting to break its series of lower highs after beginning to make a series of higher lows. From a breadth perspective, things appear to be healthy within the equity market.

Natural Gas
After declining nearly 45% since its November peak, a bullish divergence in momentum is taking place. The Relative Strength Index (RSI) made a higher low after spending some time under being ‘oversold’ under 30 as price made a lower low. Since then, as price has popped higher so has momentum with the RSI indicator break above its prior high before price has been able to. I view this as a positive and will be watching to see if $UNG is able to get back to its 2015 high near $17. JC Parets recently wrote a post on nat gas as well, citing some interesting points concerning sentiment.

Momentum
While Breadth has confirmed the recent high; moment has not, at least not yet. on both the daily and weekly chart momentum remains below its prior highs. The RSI indicator is currently testing it’s prior high set in December and while the MACD is above its respective December high, it’s still under the peak set in November. The Money Flow Index, which is one of the few indicators I watch based on its absolute level, is currently extended to the upside. While it’s use as a timing mechanism has an iffy track record, it’s still a measure of momentum I keep an eye on.

Dow Jones COT
Each week I check in on the Commitment of Traders (COT) charts. What’s great about COT data is it’s one of the only ways to actually see how traders are positioned. We are able to look under the hood of the futures and options market and see how much Commercial, Large, and Small traders are holding both long and short all kinds of commodity and financial markets.

The one set of COT data that stood out to me this week was for the Dow Jones Composite, specifically the Small Speculator Traders (red line). This trader group is made up of those often trading odd lots and can be a sign of individual trader sentiment. Last week we saw a decent size spike in the net-long position of the Small Speculators while the Commercial Traders (blue line) are shown to have been on the other side of that trade, with an increase in their net-short position. This is now the largest disparity since 2011, and the second largest net-long position since 2011 for Small Speculators.

60-Minute S&P 500
Checking in on the intraday chart of the S&P 500 we can see the up trend off the created support at 1990. With the early February test of this level of support we had a second bullish divergence in the RSI momentum indicator, sending stocks to an eventual new high. The slight drop last week was bought at the 50-1hr Moving Average but also is being accompanied by a bearish divergence in the MACD indicator.

Last Week’s Sector Performance
While last week was a shortened, traders appear to have shown preference for Health Care ($XLV), Industrials ($XLI), and Utilities ($XLU) as they were the strongest relative performing sectors for the week. Energy ($XLE), Financials, ($XLF) and Consumer Staples ($XLP) all under-performed the S&P last week.

Year-to-Date Sector Performance
Materials ($XLB) and Health Care are the best performing sectors so far for 2015. While Utilities and Financials are the two worst performing sectors YTD.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.