Weekly Technical Market Outlook 6/9/2014

It’s great to see the S&P 500 ($SPX) hit new highs and actually be accompanied by signs of bullish confirmation. This wasn’t a luxury we had very often in 2013. While I think it’s possible we see some form of consolidation or short-term weakness, the bull market appears to be well intact.

Now speaking of potential short-term weakness, 75% of the data sets that make up my mean-reversion indicator flipped negative on Friday. Three of the past four instances I’ve seen this negative of a reading proceeded declines in the S&P 500 ranging from 10% to 17%. I view this as a window opening for the bears to jump through, it’s just a matter if they decide to take it, which requires price to begin to confirm.

Trend

Another new high keeps the trend in the S&P 500 ($SPX) positive. The index sits firming above its 20-day and 100-day Moving Averages as well as its trend line drawn off prior lows.

Breadth

As I mentioned in the first paragraph, with the new high we saw a host of confirming market internals. One of which is the Common Stock-Only Advance-Decline Line. This measure of breadth closed out the week on strength right along with the equity index. The Percentage of Stocks Above Their 200-Day Moving Average, while not at a new high, has been rising steadily from its most recent low made in May.

Momentum

Last week I discussed how the Relative Strength Index (RSI) had broken above its falling trend line, which while bullish did not invalidate the negative divergence that had developed. However, on Friday we saw the RSI close above 70, which does in fact end the divergence that had been plaguing us for the last five months. The weekly RSI also broke above 70 which is bullish as buyers maintained control and prevents a negative divergence from developing on the longer time frame.

We did see the Money Flow Index break above its ‘overbought’ level, which has brought about some short-term consolidation or drops, which wouldn’t be much of a surprise as just like California Chrome, every horse needs to take a breather.

Six of the nine S&P sectors also have their daily Relative Strength Index’s above the ‘overbought’ 70 level. The three sectors that don’t have RSI’s above 70 are the three defensive sectors: Health Care, Consumer Staples, and Utilities. This tells me that buyers weren’t pushing up the major indices on the backs of the safe-haven pieces of the market, a positive sign for market bulls.

‘Insider’ Selling

According to a report by Neil Leeson of Ned Davis Research, ‘insiders’ selling has picked up recently. In an article at USA Today Lesson was quoted, “Despite the fact that most investors feel they have no alternative to being fully invested (in stocks), there is one crowd of investors who has turned into pretty consistent sellers, and that’s corporate insiders.” When looking at the chart from NDR below you’ll notice there was a ‘sell signal’ albeit less severe generated at the start of 2013, which did little to prevent the equities market from marching higher.

Dow Jones Components Relative to 52-Week Highs and Lows

This is a chart I haven’t shown before on the blog. It’s something created by Decision Point, and looks at the individual components of the Dow Jones Industrial Average ($DIA) and where they sit relative to their respective 52-week highs and lows. If a Dow component is at a 52-week high then it receives a value of ‘100,’ if it’s at the middle of its 52-week high and low then it receives a ’50,’ and so on. The below indicator takes the average of all 30 Dow stocks.

As you can see, when this figure breaks above 85 we’ve seen the bulls take a break from driving the train and stock prices see a period of decline. The most recent example of this was at the end of last year before the 6% drop in January. Looking at where we currently stand, on Friday’s close the Dow components had an average value of 85%, right at our mean-reversion threshold.

60-Minute S&P 500

As stocks continue their ascent we have the S&P above its 50-1hr Moving Average while making higher highs. The RSI indicator is hitting a historically high level.  Two recent examples of this momentum indicator hitting 82.74 was in February as the stock index ignored the lofty value and continued marching higher and in late-December, just before price peaked out and fell 6%. We’ll see which one traders decide to replicate.

Last Week’s Sector Performance

It looks like last week was another period of ‘risk on’ trading (I know a lot of you hate that phrase, sorry!) with Industrials ($XLI), Financials ($XLF), and Consumer Discretionary ($XLY) leading in relative performance. We can also see the chase for beta in who under-performed last week, Health Care ($XLV), Utilities ($XLU), and Consumer Staples ($XLP).

Year-to-Date Sector Performance

While the Utility sector has stumbled recently, it continues to be the leader for 2014 followed by Energy ($XLE) and Health Care.

Major Events This Week

It looks like we are going to have a pretty uneventful week as far as economic reports are concerned.

Monday: None
Tuesday: JOLTS
Wednesday: None
Thursday: Jobless Claims, Retail Sales,
Friday: Producer Price Index
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.