This week jittery bulls pushed through a swirl of headlines to loosen the grip bears have on this market. There have been no new lows since my last post on the double bottom, and the bulls managed to push through the down-trend line and some overhead resistance on short-term charts (see Chart 1). Risk-appetite, measured by the HYG ETF, has re-emerged, with the HYG rallying nicely this week. Lastly, market volatility, so essential to the bear case, continued to drift lower. However, the $VIX index remains above its recent lows, fed by a flurry of headlines and we had an outside day to end the week, possibly capping the short-term rebound. So, the bears are happy to lurk in the shadows of political uncertainty, listening to the drums of war.
Chart 1: The broad-based NYSE Composite Index was able to move past the down-trend line and briefly break-out above resistance on the 60-minute chart, as the bulls struggled to loosen the grip of the bears.
Risk Appetite Improves
A good sign for the bulls is the return of risk-on positioning, measured here by the HYG ETF. The iShares iBoxx High Yield Corporate Bond ETF rallied nicely this week into overhead resistance at 86.4 turning it's short-term trend bullish.
Chart 2: The HYG ETF rallied in one of the first signs of traders turning more to a risk-on posture. It's short-term trend is now bullish, though it has reached some overhead resistance near the early February lows.
Volatility (The Breath of Bears) Subsides
Even as headlines swirled, the $VIX index remains well contained by recent highs, and drifted lower through the week. Though it remains around the 17.5 level which marked previous resistance and above it's recent lows, the bulls can draw comfort form the fact that it has turned lower even as the market formed a double bottom.
Where the Trends Are
I looked in two places in search of trends. I first did a scan with SCTR > 90 and Chande Trend Meter > 90 to find the strongest market sectors (see Chart 4). Cyclicals, Energy, Health Care and Technology are the sectors with the largest number of strong stocks.
Chart 4: The strongest stocks are in the sectors along the X-axis, with Cyclicals, Health Care, Energy and Technology being the sectors with the largest number of stocks with the best relative performance and strongest absolute trend strength.
The second place I looked was by segmenting the market by market capitalization and portfolio design (value, blend or growth), the usual 2-D matrix popular in the industry for allocating capital. I simplified the data presentation by classifying the trend in each time period (short, medium, intermediate and long) into three stages: bearish, neutral or bullish. For easy reference, when the market was trending in January, all the boxes were green. Conversely, during the heavy selling, all the boxes in the short-term and medium-term were crimson (bearish). So, the table shows that the market internals have improved a bit this week (more gold, fewer crimson squares). Another way to present the same data is to rearrange the trend picture by time-period (see Chart 6). Notice that the long-term trend remains bullish, even as the trends along the short-term and medium-term (which were bearish last Friday) have improved to neutral. (A detailed look at the trend-following models is here.) Value portfolios are generally the weakest, and growth-oriented portfolios the strongest at the moment.
Chart 5: Breaking-down the usual portfolios by market capitalization (Small through Mega) and portfolio design (Value / Blend / Growth), the short-term and medium-term weakness in blend and growth portfolios offers an entry point in the direction of the positive long-term trend (Color codes: red - bearish, gold - neutral, green - bullish).
Chart 6: The data in Chart 5 were rearranged by time period along the columns (ST = short-term, MT = medium-term, IT = intermediate-term and LT = long-term). Notice that the long-term trend is mostly bullish, except that mid-cap and large-cap Value portfolios have turned flat. There has been a lot of selling pressure in the large-cap and mega-gap stocks (e.g. crimson MT and IT boxes for large- and mega-cap stocks). At the same time, mid-cap and small-cap stocks have rebounded a bit this week.
The double-bottom gets stronger with each passing day, though it remains within reach of a panic sell-off. The bulls must sort out the relative importance of earnings versus the conflicting headlines competing for their attention (for example, see this CNBC article on market sentiment vs. earnings).
For a ranking of the iShares ETFs universe by relative and absolute performance, look here.
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