RISING PRICE CHANNEL SHOWS ROOM TO RUN FOR THE DOW -- MACD-HISTOGRAM EXTENDS POSITIVE STREAK FOR S&P 500 -- BREADTH CONFIRMS UNDERLYING STRENGTH IN BROADER MARKET -- SMALLER SPX STOCKS LAG, BUT EQUAL-WEIGH INDEX HITS NEW HIGH
RISING PRICE CHANNEL SHOWS ROOM TO RUN FOR THE DOW... Link for todays video. Stocks have been on a tear since mid November and show now signs of reversing course. We can argue about overbought conditions, the employment participation rate and the Fed affect, but there is simply no debate on trend direction (up). Chart 1 shows the Dow Industrials within a rising channel since September 2011. By my count, there have been three pullbacks within this uptrend (November 2011, April-May 2012 and October-November 2012. The current advance is in its 25th week and the Dow is up almost 20% over this period. Even though the advance looks overextended, a trend in motion stays in motion and the Dow could run another 1000 points. This project is based on a rising channel extension. Using a little indicator trick, I added a blank upper window and extended the chart 15 weeks to show these channel extensions. Chart 2 shows the settings used in the Chart Attributes and Indicators sections. Basically, I added Price as an indicator and used a fictitious symbol to create a blank window. The lower trend line extends from the September 2011 closing low and extends to the November 2012 closing low. The upper trend line is parallel and extends from the March 2012 closing high. The upper trend line extends to the low 16000 area in July-August. The February consolidation and lower trend line mark support in the 14000 area.
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Chart 1
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Chart 2
MACD-HISTOGRAM EXTENDS POSITIVE STREAK FOR S&P 500 ... Chart 3 shows the S&P 500 within a larger rising channel since June 2010 (blue trend lines). The index moved above the upper channel trend line this month, but shows no signs of slowing down. The pink trend lines mark a steeper, and smaller, channel extending up from the August 2011 low. This lower trend line appears to be the line of best fit. The upper trend line is parallel and extends from the April 2012 high. This channel shows further room to run. The indicator window shows the MACD-Histogram turning positive at the beginning of 2013 and remaining positive the last 17 weeks. Notice that the MACD-Histogram was positive for 26 weeks from September 2010 and for 27 weeks from October 2011. The last two run show just how long this indicator can remain positive. Momentum is clearly bullish as long as this indicator remains in positive territory.
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Chart 3
BREADTH CONFIRMS UNDERLYING STRENGTH IN BROADER MARKET... The AD Line, AD Volume Line and High-Low Line for the S&P 1500 confirmed the new highs in the S&P 500 and S&P 1500 ($SPSUPX). The S&P 1500 is a broad index that consists of the S&P 500, S&P SmallCap 600 and S&P MidCap 400. It is a good index to use for breadth indicators and to assess the broader stock market. Chart 4 shows the S&P 1500 AD Line ($SUPADP) surging to a fresh 52-week high this week. Chart 5 shows the S&P 1500 AD Volume Line ($SUPUDP) also hitting a 52-week high. The April lows mark key support for both lines. A top in the market looks unlikely right now because both confirmed the new highs in the underlying index. Chart 6 shows the S&P 1500 High-Low Line ($SUPHLP) moving above its 10-day EMA in late November and rising ever since this bullish cross. There is no sign of weakness here either.
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Chart 4
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Chart 5
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Chart 6
The AD Line is a cumulative measure of net advances percent (advances less declines divided by total issues). This indicator favors small and mid-cap stocks because there are more small-cap and mid-cap stocks than large caps. An advance counts as +1 and a decline counts as -1, regardless of market capitalization or volume. The AD Volume Line is a cumulative measure of net advancing volume percent (advancing volume less declining volume divided by total volume). It favors large-cap stocks because they are the volume leaders. The High-Low Line is a cumulative measure of net new highs percent (52-week highs less 52-week lows divided by total issues). This breadth indicator can lag because extended trends are required to produce 52-week highs and lows.
SMALL-CAP STOCKS LAG, BUT EQUAL-WEIGH INDEX HITS NEW HIGH... Small-caps and mid-caps have been dragging their feet over the last few months, but we have yet to see a breakdown in a key performance ratio. Moreover, the S&P 500 Equal Weight Index ($SPXEW) and Russell 2000 ($RUT) both hit new highs this week, which means they are not all that weak. Chart 7 shows the S&P 500 Equal Weight Index in a clear uptrend with a new high above 2500 this week. There is clearly no downtrend here.
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Chart 7
The S&P 500 Equal Weight Index is a great index to use for relative strength comparisons because it has the same stocks as the S&P 500. The S&P 500 is dominated by large-caps and the top 50 stocks account for over 45% of the index. In contrast, the top 50 stocks in the equal-weight version account for less than 15% of the index. Chartists interested in the broader market, or other 450 stocks, should watch the S&P 500 Equal Weight Index. The indicator window shows the $SPXEW:$SPX ratio advancing from October to February and then turning flat. $SPXEW outperformed and then performed in-line. This relative performance indicator is still in bull mode because it has yet to break down and suggest relative weakness in the smaller stocks of the S&P 500. Notice how the price relative broke support in mid July 2011 an early April 2012. Both breaks preceded stock market corrections. Chart 8 shows the Russell 2000 ($RUT) hitting a 52-week high this week, but the small-cap index is underperforming the S&P 100. I am not too concerned at this point because the Russell 2000 did hit a 52-week high and $SPXEW:$SPX ratio has yet to break down.
