MORE STOCKS ARE TRADING ABOVE THEIR 200-DAY AVERAGES -- S&P 500 REGAINS 200-DAY AVERAGE -- ITS EQUAL WEIGHT VERSION STILL LAGS BEHIND -- SMALL CAPS MAY BE STARTING TO CATCH UP -- CYCLICALS, INDUSTRIALS, AND TECHNOLOGY ARE WEEK'S SECTOR LEADERS

MORE STOCKS CLEAR THEIR 200-DAY AVERAGES ... My Wednesday message showed that the percent of NYSE stocks above their 200-day average had declined during November to as low as 27% (about where it was at the same time in 2011). I suggested that the number needed to exceed its earlier peak at 40% to resume its uptrend. The red line in Chart 1 shows the $NYA200R rising 9% this week to 36%. That puts its only 4% from its early November peak. I also pointed out on Wednesday that a move above 40% near the end of 2011 helped that market resume its uptrend. The percent of NYSE stocks above their 50-day average jumped 14% to 56%. That's a healthy number.

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Chart 1

S&P 500 REGAINS ITS 200-DAY AVERAGE -- EQUAL WEIGHTED VERSION LAGS... This time last week, the S&P 500 Index had fallen back below its 200-day average and was testing chart support at its September peak at 2020 (and its 50-day moving average). It survived that test and regained its 200-day line this week. In so doing, its 3.27% gain was the biggest of the year. Large caps, however, which dominate the cap-weighted SPX, are still leading the market higher. Chart 2 shows the Guggenheim S&P Equal Weight ETF (RSP) still trading below its 200-day line. Since all stocks in the RSP are equally weighted, it gives less weight to larger stocks. A move back above its 200-day line would be a positive sign for it and the rest of the market.

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Chart 2

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Chart 3

SMALL CAPS START TO CATCH UP ... Small caps may be starting to play catch up to larger stocks. Chart 4 shows the S&P 600 Small Cap Index ($SML) gaining 0.82% on Friday which was more than twice the S&P 500 gain of 0.36%. That also caused a slight uptick in the SML/SPX ratio on top of the chart (see circle). The SML needs to clear its 200-day line and early November high to turn its trend upward. That's more likely to start happening as we enter the final month of the year. That's when the so-called "January Effect" starts to favor smaller stocks.

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Chart 4

CYCLICALS, INDUSTRIALS, AND TECHNOLOGY LEAD MARKET HIGHER... Another positive sign for the market is that economically-sensitive sectors are leading it higher. This week's three strongest sectors are cyclicals, industrials, and technology. Chart 5 shows the Consumer Discretionary SPDR (XLY) gaining 4.5% during week after bouncing off chart support along its moving average lines. It was led higher by footwear, apparel and specialty retailers, auto related, home improvement and homebuilding stocks. Chart 6 shows the Industrials SPDR (XLI) ending the week at the highest level in five months. It was led higher by defense stocks and rails. Chart 7 shows the Technology SPDR (XLK) closing the week just shy of a new high. Its relative strength ratio (top of chart) is also close to a new high. Semiconductors helped lead it higher. Financial stocks also had a strong week. All other sectors gained ground, although the more defensive healthcare and staple sectors lagged behind. Weak commodity prices continue to weigh on energy and materials.

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Chart 5

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Chart 6

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Chart 7

TRANSPORTS MAY BE NEARING UPSIDE BREAKOUT... One of the main principles of Dow Theory is that a true bull market can't exist unless the Dow Industrials and Transports are rising together. Up to now, that hasn't been the case. But that may be about to change for the better. Chart 8 shows the Dow Transports testing a flat resistance line along its September/October highs. Its 200-day average is just above that level. The TRAN broke its down trendline back in October and has traced out an apparent "ascending triangle" starting in August. An ascending triangle shows two converging trendlines with a flat upper line and rising lower line. It's usually a bullish pattern which is completed when the upper line is broken. The Transportation/Industrials ratio (top of chart) may be starting to bounce off its summer bottom. That may be a good sign for the transports and the market. Airlines have been relatively strong over the last few months, while rails picked up this week. Delivery service stocks should also pick up as we enter the holiday season.

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Chart 8

AIRLINES AND DELIVERY SERVICES ARE TRANSPORT LEADERS ... Airlines have been the strongest part of the transports. Chart 9 shows the Dow Jones US Airline Index having reached a new seven-month high during October. Its recent pullback bounced off its moving average lines. its relative strength line (above chart) has been rising since July. Airline leaders are Southwest (LUV), JetBlue (JBLU), and Delta (DAL). They also benefit from lower oil prices. Chart 10 shows the Dow Jones US Delivery Services Index trading above its 200-day average. It needs to clear the neckline drawn over its June/ October highs to achieve a bullish breakout. United Parcel Service (UPS) is the group leader. A good holiday season could give the group a yearend lift.

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Chart 9

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Chart 10

MY APOLOGIES FOR HAVING TO CANCEL THIS AFTERNOON'S WEBINAR ...