PERCENT OF NYSE STOCKS ABOVE 50-DAY AVERAGE REACHES TWO-YEAR HIGH -- % OVER 200-DAY LINE TESTS FOURTH QUARTER HIGH -- NYSE ADVANCE-DECLINE LINE LOOKS STRONG -- NYSE BULLISH PERCENT INDEX CLEARS 50% -- BUYING OF CORPORATE AND JUNK BONDS SHOWS NEW OPTIMISM
PERCENT OF NYSE STOCKS ABOVE 50-DAY AVERAGE REACHES TWO-YEAR HIGH... The debate continues about whether the stock market faces the likelihood of another downleg. Several technical indicators seem to suggest that a major selloff is unlikely. Here's the first one. I recently showed the NYSE percent of stocks above their 50-day moving average moving up to test its fourth quarter high just below 75%. Chart 1 shows the blue line having broken that previous chart barrier to exceed 80%. That's the highest level since June 2014 which is nearly two years ago. Readings over 80% often indicate a short-term overbought condition. The good news, however, is that kind of strength is unusual during a bear market. That's one vote against a major downturn from here.
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Chart 1
NYSE PERCENT OF STOCKS ABOVE 200 DAY MOVING AVERAGE TESTS FOURTH QUARTER HIGH... The red line in Chart 2 shows the NYSE percent of stocks above their 200-day moving average. The downturn in that indicator last year was one of the early warnings that the stock market was due for some type of correction. The good news is that the red line bottomed in January near 15% which was a successful retest of its August low from last summer. It is now in the process of testing its November peak at 41%. A move above that chart barrier would be a positive sign for the market. An eventual move above 50% would be even more positive by signalling that more NYSE stocks are in uptrends than downtrends. It has backed off its November high which reflects some short-term selling. It's overall pattern, however, suggests a market that is trying to find a bottom.
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Chart 2
SOME HISTORY ... Chart 3 shows the % of NYSE stocks above their 200-line since 2002. Drops below 20% have happened only four times since 2000 (red circles). The previous three upturns from those levels marked the end of two bear markets (early 2003 and 2009) and a correction in late 2011. Subsequent moves back above the 50% level (green line) helped to confirm a market upturn. This low a reading in the red line has usually signaled the end of a market downturn, not the start of one.
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Chart 3
NYSE ADVANCE-DECLINE LINE TURNS UP ... The NYSE Advance-Decline line, which is the most widely used measure of "market breadth", is a running cumulative total of big board advancing stocks minus decliners. That's the solid black line in Chart 4. The dashed line is the S&P 500 Index. The downturn in the AD line between last May and July gave an early warning of the August market drop. After rebounding, the AD line again rolled over during December and gave another warning of market weakness the following month. During this quarter, the solid line is actually rising faster than the S&P 500 (and other market indexes). The first quarter rebound in the solid line is also stronger than its previous upturn that started in August. That looks to me like a sign of market strength, not weakness. It will be instructive to see what the NYSE Advance-Decline line does when it reaches its fourth quarter high. That will be an important test for it and the market.
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Chart 4
NYSE BULLISH PERCENT INDEX ON BUY SIGNAL ... Just one more. The solid line in Chart 5 is the NYSE Bullish Percent Index ($BPNYA), which meaures the percent of big board stocks on point & figure buy signals. The dotted line is the NYSE Composite Index. The failure of the solid line to confirm the new high by the NYSE Composite Index last spring was a "negative divergence" that warned of a market downturn (see red line). Both then fell together into January. The good news is that the BPNYA bottomed in January in oversold territory near 20% and has already exceeded its fourth quarter high. [My February 20 message showed the BPNYA index giving a p&f buy signal at 36%]. There again, that measure of market breadth has risen faster than the NYSE Index. Rising market breadth is usually a good sign.
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Chart 5
MONEY FLOWS BACK INTO CORPORATE BONDS... I keep reading in the media that bond traders are a lot smarter than stock traders. Last year's trading may show some evidence of that. Corporate bond prices turned down last year well ahead of stock prices. Chart 6 shows the iBoxx Investment Grade Corporate Bond iShares (LQD) peeking last April before plunging into June. Stocks didn't turn down until four months later during August. The good news is that the LQD has bounced sharply off its summer lows, and is now in the process of testing its October high. The chart has the look of a bottom pattern in the making, especially if the October peak is exceeded. That shows a lot more confidence than we saw this time last year. If bond traders really are smarter than stock traders, their renewed confidence may be worth paying attention to.
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Chart 6
JUNK BONDS ALSO RECOVER ... Another place where investors are taking on more risk is in junk bonds which were one of last year's worst performers. Not this year. Chart 7 shows the iBoxx High Yield Corporate Bond iShares (HYG) rallying to the highest level in nearly four months. Some of that is the search for higher yield. Some of it may also be more optimism in energy and mining shares which weighed heavily on junk bonds last year, but which have rebounded this quarter. Junk bonds are considered the riskiest part of fixed income. The willingness of investors to buy back into the group is an encouraging sign. The fact that corporate bonds are starting to outperform Treasuries over the last month is another sign that bond traders are turning less risk averse. That's usually also good for stocks. I hope those bond buyers are as smart as everyone says they are.
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Chart 7
DISCRETIONARY SPDR TESTS 200-DAY LINE... Market uptrends aren't usually led by defensive stocks like consumer staples. At the moment, staples are one of the market's strongest sectors (along with utilities, REITs, and telecom), and are hitting new highs today. Some of that probably has to do with their dividend-paying qualities in a world of negative interest rates (with more likely to come from the ECB tomorrow). Part, however, may also be due to investors playing defense. That's not a sign of confidence. Consumer Discretionary stocks were the top performers during the bull market that started exactly seven years ago in March 2009. They were one of the market's weakest performers at the start of this year. During February, however, , the Consumer Discretionary SPDR (XLY) became the new sector leader. That improvement is reflected in the relative strength ratio on top of Chart 8. That chart also shows the XLY challenging its 200-day moving average. A close above that chart barrier would be a positive sign for that economically-sensitive sector and the market. So would an upside breakout in material stocks.
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Chart 8
MATERIALS SPDR ALSO TESTS 200-DAY LINE ... Chart 9 shows the Materials Sector SPDR (XLB) also challenging its 200-day line. That commodity-related group has also gone from a market laggard to a market leader of late. That can be seen by its rising relative strength ratio (top of chart). The XLB has benefited from strong rebounds in precious and industrial metals, and stocks related to them. That, along with a rebound in the energy sector, raises hope that the commodity depression may have finally ended. That would be a big plus for global stock markets, especially those tied to commodities like Australia, Canada, Latin America, Russia, and emerging markets in general.
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Chart 9
AUSTRALIA ISHARES BREAK OUT... My Monday message showed the Aussie Dollar breaking out to an eight-month high. I also showed Australia iShares (EWA) on the verge of doing the same. And they have. Chart 10 shows the EWA climbing nearly 3% today to a new seven-month high (after clearing its 200-day line). Both are benefiting from the recent surge in commodity prices like copper and iron ore. The Canadian Dollar and Canada iShares (EWC) are also having a strong day (as is oil-producing Russa). My Monday message made a case for a bottom in Canadian stocks. To my mind, that seems to strengthen the case for a bottom having been reached in commodity markets. That should be a positive development for global stocks and their respective economies. Which probably also reduces the likelihood for another bear leg in global stocks.
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Chart 10
HOW ABOUT A SIDEWAYS MARKET ... The market is giving off conflicting messages. Technical indicators are showing improvement. Market leadership, however, shows a generally defensive posture. Which leads me to suspect that the current market isn't that bullish or bearish at the moment. The indicators shown in this message argue against another major downleg. Sector leadership, however, argues against a new upleg. Which leaves us somewhere in the middle. I suspect the worst is over, but there may not be much upside either in the major averages. Which may leave us with a sideways market for awhile. In that environment, being in the right asset classes, the right sectors, and the right geographic regions should be more important. One bright spot should be stocks and currencies tied to rising commodity prices, both in domestic and foreign markets. Fixed income investors are already starting to rotate out of Treasuries into riskier bond groups. I'd also watch for signs of rotation out of defensive stock sectors into more economically-sensitive ones. Until that happens, the market may just tread water for awhile.
