Weekly Technical Market Outlook 11/3/2014

The S&P 500 closed out last week up 1.17% while small caps ($IWM) fared better, up 4.94%. and International stocks ($EFA) had a good week as they bounced 2.76%. With the strong recovery back to new highs seven of the nine S&P sectors are back above their respective 50-day Moving Averages. Materials and Energy remain the laggards, still trading below their intermediate MA.

Trend

As the V-shaped recovery pushed the S&P 500 to a new high, we now have the ingredients for a new positive trend in stocks. I had been watching the prior trend line off the past series of higher lows (dotted green line) and whether it would act as resistance on the bounce, it did now as stocks powered higher. Price is now firmly back above the 100-day Moving Average and 20-day MA.

Breadth

When the market makes a new high, what do you not want to see? Breadth not confirming the high by still being under its own previous peak. As measured by the Common Stock Only Advance-Decline Line and the Percentage of Stocks Above Their 200-day Moving Average, breadth is continuing to diverge from price.

One positive note to make about breadth, is that the S&P 500 A-D Line (not shown) has confirmed the new high in stocks. So which is more important, the NYSE Common Stock Only or the S&P Advance-Decline Line? The price action over the next couple weeks will likely let us know.

New 52-Week Highs

While the Breadth chart above shows a bearish divergence and a lack of confirmation, how many stocks in the NYSE did in fact try to confirm the new high in the major index? A pretty large amount, 521 to be exact. This is the most issues on the NYSE to hit a new 52-week high since May 2013 and before that it was 2010. During the bull market off the ’09 low, when we’ve seen this many stocks hit a new high we’ve seen the S&P pull back on a short-term basis.

While a lot of traders have been comparing this market to the peak in 2007, myself included in the post from October 15th, We Haven’t Seen a Market Top Yet. However, this spike in new highs puts another arrow in the quiver for the bulls, as this set of data created a large divergence back in ’07, not showing the strength we saw on Friday.

Momentum

The downtrend in the Relative Strength Index (RSI) is nearly over with the momentum indicator testing the prior high around 68 and has broken above its falling trend line.  The Weekly RSI is still showing a series of lower highs, as last week’s rally did not push hard enough in getting momentum higher. The Money Flow Index is now ‘overbought’ and may be signaling for a short-term decline in stocks.

Bond Market

If you believe that bond market is ‘smarter’ than the equity market, this next chart has likely kept you out of stocks for the bulk of 2014. Traders have continued to show a preference for long-dated Treasury bonds over High Grade debt, pushing the ratio between the two into a down trend. The same can be said for the 10-Year Treasury Yield.

There use to be a time where bonds would confirm the moves made in stocks and this would make traders feel nice and cozy inside, but that time has passed. Either the correlation between stocks and bonds is changing or traders no longer feel High Grade bonds deserve to be price like stocks.

60-Minute S&P 500

It’s hard to not appreciate the level of aggressive traders had during the recovery off the October low in the S&P 500 ($SPX). Gap ups have gone unfilled and momentum has remained elevated for the majority of the advance. We now have a level of support in the Relative Strength Index by connecting the lows. A break of this support zone will likely act as a ‘tell’ for an intraday decline. While there is a slight divergence in the MACD, the strength in the RSI in my opinion outweighs it. When these two momentum indicators tell different stories, I often find myself relying more heavily on the RSI, but that’s just me.

Sector Relative Strength

We’ve seen quite a bit of improvement on the Relative Rotation Graph. Five of the nine S&P sectors are now in the ‘leading’ category, although Consumer Discretionary ($XLY) is close to falling into the ‘Weakening’ category as its trend  and trend strength both appear to be losing steam. Materials ($XLB) and Energy ($XLE) continue their trek deeper into the ‘Lagging’ category, unable to get a good footing to improve relative the S&P 500.

International Relative Strength

Traders have continued to show preference for U.S. equities over their international brethren. It’s been five weeks since we last saw a foreign market in the ‘Leading’ category. While a handful of countries are strengthening  in the momentum of their relative trend, only one, the Netherlands ($EWN) has been able to break into the ‘improving’ category.

Sector Performance Off the Low

Understanding sector leadership off a low can help us better understand of the strength the move in stocks had. The best performing sector off the October 15th low was Health Care ($XLV) followed by Industrials ($XLI). Consumer Staples ($XLP) which held up well during the down turn, being the second best sector, was not shown a positive bias on the march back to new highs.

Sector Performance Year-to-Date

Not much as changed for sector leadership for 2014, with Utilities ($XLU), Health Care, and Technology ($XLK) still holding the top three spots. Energy ($XLE), Consumer Discretionary, and Materials have been the 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.