Trend Checking The Market
The major indexes all rallied sharply towards month end, and with that our trend-check carpet has turned positive over the short term. The short-term trend check carpet tells us that the broad market is now trending higher on the short term, in sync with the long-term, which increase the odds that the rally can continue.
Chart 1: All of the major indexes are now trending higher over the short-term. Market breadth increases from left to right, from 30 to over 2000 stocks.
For example, after drifting lower for 8-9 weeks, the SPX broke out with a crossover on the 20-day Aroon indicator, with the green like touching 100 as the market approached new highs (see Chart 2).
Chart 2: The large cap stocks broke out of a seven week downward drift. The Aroon crossover gave an early hint of the breakout to come.
The multi-period trend check carpet in Chart 3 shows that the trends are mixed in the medium- and intermediate-term. The long-term trend remained higher on all indexes throughout April. The degree of smoothing increases from top to bottom, and the market breadth increases from left to right.
Chart 3: The major market indexes are now comfortably pointing higher on the short-term and long-term, reflecting the rebound after the recent consolidation. The recent consolidation effects are still visible in the mixed trend picture in the medium- and intermediate- term charts.
We next trend check the core sectors of stocks, bonds, gold and the dollar. As stocks have rallied, the trends in bonds and gold have weakened, due to their negative correlation, which we have discussed in our last several posts (see Chart 4).
Chart 4: The short-term trend in bonds and gold has weakened from up to flat, as the SPX short-term trend has turned higher. The dollar remains in down-trends from medium-to-intermediate term, as the stronger economic activity in Europe and the French election results have drawn interest to the Euro.
Path of Resistance is Higher
The rally has now changed our path-of-least-resistance matrix. We apply our trend-following models to the Russell 1000 universe and then roll-up the data into a up/not-up binary breakdown. The resultant summary is a good measure of the market's path of least resistance (see Chart 5).
Chart 5: The short-term, intermediate-term and long-term trend is now higher. If the market continues to improve, all dials will be in the green.
By month end, the three strongest sectors were technology, consumer discretionary and industrials (see Chart 6) on an intermediate-term basis.
Chart 6: We show the trend-strength of key indexes and major sectors in the S&P 500 universe. Technology, consumer discretionary and industrials are the strongest sectors along with the QQQ, Dow and SPX.
Our long-term trend-following models show the underlying stocks participating in the uptrend (see Chart 7). This chart is sorted from highest cash allocation to lowest. The stronger the trend in a sector, the smaller the amount of cash. This list differs from Chart 6 because the time-period of the calculation is much longer. This chart is useful to long-term position investors to assess their own sector allocations.
Chart 7: The long-term trend-following model shows which sectors have the most stocks participating in the uptrend. The weakest sectors are on top.
Yet another way to measure trend strength is to simply look at moving average combinations. We can that trend-check to allocate more to stronger sectors, and less to the weaker sectors. Thus, we can create a trend-weighted sector allocation as shown in Chart 8.
Chart 8: A trend-weighted sector allocation scheme, that adjusts weights away from a simple equal allocation scheme. I used only the major sectors in the S&P 500 universe.
The Strongest Stocks in the Strongest Group
A review of the strongest stocks in the QQQ pulled up the charts for EA, FB, and LRCX . Note how all of these stocks have a Chande Trend Meter values above 95, on a scale where 100 equals strong up.
Chart 9: EA breaks out with high CTM values.
Chart 10: Facebook is in a solid uptrend.
Chart 11: Lam Research has moved up steadily along with strength in semiconductors since the middle of 2016.
The SPX has formed what may be visualized as a cup during the recent consolidation (see Chart 12). As it approaches prior highs, it may need to form a bit of handle as it catches its breath before pushing higher. The equal weight S&P 500 ETF (RSP) shows the stair-step rally since the election as the market paused before pushing higher.
Chart 12: The 60-minute chart of the SPX shows the cup of the recent consolidation. A handle would help the market catch its breath before pushing higher.
Chart 13: The equal weight S&P 500 ETF (RSP) shows the stair-step climb of this rally. We have moved into overhead resistance.
So the weighted and unweighted large cap stocks tell the same story: we have to push through some moderately strong resistance at the March highs.
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