Market Extends Gains As Breadth Surprisingly Improves

More stocks trading above their 150-day MA’s

Last week I pointed out that many indicators were overstretched, thereby indicating the probability of a correction. I also stated that during a bull market, surprises typically develop on the upside. Consequently, if the market was able to shrug off its overbought status and trigger higher prices that overstretched condition would likely result in  an environment of greater selectivity.  What has surprised me is the fact that the market has moved higher but that the breadth of the advance has widened rather than narrowed. This again underlines the point that it is generally a fool’s errand to fight the main trend, which in this case is an upward, one.

Just look at Chart 1, which shows the percentage of S&P stocks above their 150-day MA ($SPXA150R). It has not only failed to break below the red support trendline, but has resolved the recent trading range with a break to the upside. Such action indicates that the breadth of the advance is more likely to widen rather than narrow. At a current reading of 70, though, it is already pretty extended.

Chart 1

Chart 2 informs us that the NYSE A/D Line based on all listed issues, and one limited to common stocks, are both confirming the latest S&P High. That does not guarantee that stocks won’t fall, but it is certainly a positive underpinning.

Chart 2

Chart 3 rounds out the breadth picture with a strong showing by the net new high low indicator for NYSE stocks. This one has managed to slightly exceed the peaks established last July and December, with a reading just shy of 500. It has not exceed the 2010 level of 665. However, this represents the highest reading since this leg of the bull market began last February. It should be noted that market tops are usually associated with fewer, not larger numbers of stocks registering net new highs.

Chart 3

What sectors are breaking out?

This week’s extension to the rally has not yet been confirmed by every sector and industry group, but we have seen a lot of positive breakouts. For example, Chart 4 shows that the Spider Financials (XLF) have just broken above their recent trading range. Even the relative strength line, in the third window has gone bullish, along with the KST for relative action in the bottom window.

Chart 4

Two financial sub groups have caught my attention in Charts 5 and 6, these are the Dow Jones Brokers (IAI) and the Dow Jones Insurance (IAK). Brokers often lead the market because investors discount their profits and these companies make more money when stocks are rising than during bear markets. The IAK, on the other hand, has experienced a stronger breakout to the upside.

Chart 5

Chart 6

The resource sector has provided some leadership in the last year and continues to do so. For example, the Spider Metals and Mining ETF, the XME (Chart 7) has just broken out on both an absolute and relative basis. Both short-term KSTs are also in a rising mode, so it’s likely that the breakouts will become more decisive in the weeks ahead.

Chart 7

Staying with earnings driven sectors, we see the Dow Jones Industrials (IYJ) right on the verge of an upside breakout. A move above the rising green trendline is likely because of the bullish KST action and Monday’s breakout by the RS line.

Chart 8

One laggard that is starting to come to life is Healthcare, as reflected in the Dow Jones Healthcare ETF, the IYH.  Chart 9 shows that the price has just broken out from a 6-month consolidation inverse head and shoulders formation, which is being supported by positive KST action. Relative action has not yet broken to the upside, but is close. Here again a bullish KST is likely to result in a positive violation of the August/February down trendline.

Chart 9

Bonds due for an unexpected rally?

It seems as though everyone is bearish on bonds right now. That’s not surprising since the economy, as monitored by the leading indicators, is definitely picking up. Inflation is headed in the same direction, and the Fed is set to hike short-term rates twice more this year. By the same token, the latest reading from Market Vane places bulls as a moderately bullish 61%, not the sort of thing that intermediate lows in a primary bear market get stimulation from. However, Chart 10 shows that the Barclays 20-year Trust, the TLT has just experienced a marginal KST buy signal as the price comes back to test the red support trendline. If that line is violated, then we would probably see a move to new lows. However, apart from what I read as the consensus bearish environment there is one thing that bothers me about being near-term bearish. That has to do with the fact that gaps are almost always closed or an attempt is made at closing them. You can see that from the solid blue arrows in the chart. However, there is one huge gap that has yet to be closed. That one is flagged by the dashed arrow and stands in the $127-129 area.

I think bond prices ultimately have much further to run on the downside, so that makes me bearish. I certainly wouldn’t buy them here, even for a trade. However, I still get that nagging feeling that we could see a false breakout above the green trendline as some form of an attempt to close the gap is made. That’s not a prediction, merely a worry.

Chart 10

Incidentally, at my Market Roundup Webinar tomorrow, I’ll be focusing on the secular trend of bond yields. Specifically, we will be looking at a checklist of technical signals that were seen at the four previous turning points that developed in the last 150-years or so. See you there!

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.