Major stock indexes continue to consolidate their November gains, and remain above recent support levels. Chart 1 shows the Dow Industrials pulling back over the last three days, but remaining above underlying support along their October peak and recent low near 29,000. Chart 2 shows the S&P 500 also pulling back, but remaining above last week's low just above 3500. Chart 3 shows the Nasdaq 100 QQQ Trust trading higher on Thursday, and remaining well above its moving average lines. It looks like the Nasdaq and the other two indexes are taking turns showing short-term leadership. A rebound in communications and technology stocks is supporting Thursday's Nasdaq gains; while utilities and healthcare are weighing on the Dow and S&P 500.

Chart 1

Chart 2

Chart 3

Although energy has been the market's weakest sector this year, it has been the past month's strongest sector. A lot of that has to do with a rebound in energy prices. The daily bars in Chart 4 reflect the November rebound in the Energy SPDR (XLE) and shows it trying to clear its 200-day moving average. That's the first important test for the sector. The XLE, however, still remains below previous peaks formed in June and August and has ways to go to turn its major trend higher. It will need a much stronger oil market to accomplish that. Chart 5 shows the United States Oil Fund (USO) running into some selling near the highs of the past two months. That's an important test of the USO uptrend and could have an impact on the direction of the XLE.

Chart 4

Chart 5

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Editor's Note: This is an article that was originally published in John Murphy's Market Message on Thursday, November 19th at 2:09pm ET.

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." - Sir John Templeton

My macro process has three key steps: Price, Breadth and Sentiment. While most measures of price and breadth indicate the bull market is in decent shape, the third step of sentiment may be indicating an exhaustion of buyers and, therefore, limited upside.

Price tells you how investors are positioned based on the basic laws of supply and demand. Does demand outweigh supply? Then prices will go higher. If there is more supply than demand, then prices will go lower. Simple.

It's actually not that simple, though, and the markets are indeed a complex system with many headwinds and tailwinds at any given moment! But price is price, and it indicates the aggregate supply and demand in the marketplace.

Even with the recent consolidation in the S&P 500, I still see a medium-term pattern of higher highs and higher lows. The market is in a confirmed uptrend.

Breadth speaks to participation. Improving breadth conditions mean the average stock is going higher, while deteriorating breadth conditions tell you more stocks are going lower than higher.

While breadth readings can tell you some information on their own, they are of much greater value when you compare price to breadth. If price is rising on improving breadth, that means that more stocks are participating in the uptrend and, therefore, it is more likely to continue. Prices rising on weaker breadth would suggest less stocks joining in the uptrend and is often associated with bull market tops.

With the cumulative advance-decline lines for the S&P 500, S&P Mid Caps, S&P Small Caps and NYSE Common Stocks all making new highs in recent weeks, the breadth picture, at present, is supportive of the recent uptrend. Breadth is bullish here.

Now that brings us to the third step, which is sentiment. Here's where John Templeton's quote starts to resonate! When we say that "markets die on euphoria," we are looking for indications that buyers are "all-in" and are bullish in their expectations and positioning.

While that seems like it should be a positive for stocks, the contrarian perspective would say that, if everyone is bullish and everyone has already bought in to the uptrend, who is left to push the market even higher?

Tom DeMark once told me that markets don't top because of an influx of sellers - it's because of an exhaustion of buyers. When no one is left to push the market higher, then price is most likely to go sideways to down.

This brings us to today's chart, showing the NAAIM Exposure Index and the Rydex fund flows.

Here, we're showing the S&P 500 index using weekly data. The lower panel includes the NAAIM Exposure Index in black and the Rydex fund flows in red.

The NAAIM Exposure Index shows weekly data measuring the equity allocation for members of the National Association of Active Investment Managers. The last two weeks have seen this indicator jump from about 70% equities to now 106% equities.

When were the last two times this allocation was over 100%? August 2020, just before the September peak, and December 2017, just before the January 2018 peak.

Rydex fund flows measure the assets in the bullish funds (long equities and sector funds) versus bearish funds (short equities and cash) in the Rydex family of funds. This ratio is charted inversely to line up better with price and the NAAIM Exposure Index.

Here, we can see that the current value of .1 is one of the lowest readings in history. The last three times we've neared this extreme low level (highlighted in pink) were December 2019, September 2018 and January 2018. The market topped out soon after each one of those occurrences.

The way market tops often play out begins with us seeing an extreme bullish sentiment reading. Check. Then we would often see some negative signals, perhaps a bearish divergence, that would suggest weaker breadth as the market moves higher. Nothing yet on that note. Finally, price itself would turn lower to validate all of the above.

Bull markets die on euphoria. By any measure I'm seeing right now, we are there.

RR#6,

Dave

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David Keller, CMT

Chief Market Strategist

StockCharts.com

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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

I'm going to keep this article short and sweet. We're going higher.

If you're still convinced that the U.S. stock market is staring at a doom-and-gloom environment, I don't know what to say. Several months ago, I created a User-Defined Index, my "Pandemic Index", to track the worst-performing indexes during the pandemic. This index of the WORST groups just broke out. Here's the chart:

The hard-hit pandemic industries like airlines, hotels, etc., are rebounding. You can bury your head in the sand if you'd like, but the truth is the truth. The worst-performing groups in March and April are now showing leadership, and that is incredibly bullish, in my view. A secular bull market requires wide participation, so I didn't believe true confirmation would arrive until my Pandemic Index broke out. Well, it broke out. The above chart shows that the S&P 500 is trading just beneath where it was at the early-September high. The Pandemic Index is well above its early-September level and it just cleared its high from June.

One lagging group in March and April is now leading the charge. It's hotels ($DJUSLG). The more industry groups that break out, the more bullish it is for U.S. equities. Hotels broke out with the vaccine news last Monday. Check it out:

Watch the top of gap support near 1950. Hotels remain strong so long as that support holds. While I understand the rush into areas that have been rising since the vaccine news, I still believe many of the best investing ideas involve companies that have performed extremely well throughout the pandemic.

On Thursday, we had another great session with our EarningsBeats.com members as we unveiled our 10 equal-weighted stocks for each of our 4 portfolios for the next 3 months. They performed exceptionally well vs. the S&P 500 on their first day on Friday. My absolute favorite stock hands-down for the next three months will be provided to our free EarningsBeats.com Digest subscribers on Monday, November 23rd. If you're interested in that stock, simply CLICK HERE and subscribe to our free newsletter! There is no credit card required and you may unsubscribe at any time.

 

Happy trading!

Tom

When I was preparing for last week's episode of Sector Spotlight and writing an article for the RRG Blog on the Growth/Value Rotation, I had to think back to an article that I wrote for this newsletter back in August.

The title for this article was "Swap from XLK to RYT to Mitigate The Increasing Risk For AAPL", which was mainly looking at the increasing risk of the dominance of AAPL in that sector. Looking back, that seems to have worked out well.

Below is the RRG showing both XLK and RYT, the equal weight variant, versus SPY.

The tails are twelve weeks long, starting on 8/28 (the date of the previous article). Initially, the tails both continued in the same direction, lower on both axes, but, after two weeks, RYT started to curl up, just after it had entered the lagging quadrant.

XLK had a similar attempt, but failed and continued to rotate further towards the lagging quadrant, while RYT continued higher on the JdK RS-Momentum scale and eventually crossed over. XLK is still inside weakening.

Over the last twelve weeks, RYT outperformed XLK by 9.1% (+7.8% vs -1.3%).

Where are we now?

XLK recently failed to break higher and take out its previous highs. This caused the relative strength line against SPY to roll over and break its rising support line.

The JdK RS-Momentum line sank below 100 in July and has since been dragging the JdK RS-Ratio lower, which positions the sector still inside the weakening quadrant and heading towards lagging.

RYT, on the other hand, did manage to take out its previous highs, which freed up renewed upside potential while protecting the downside at the level of the previous highs around $225.

The relative strength line against SPY also broke to new highs, confirming the current relative strength. And this is pushing both RRG-lines higher above 100 and further into the leading quadrant at a strong RRG-heading.

The chart above again shows the RYT price chart, but now with relative strength and RRG-Lines against XLK. This relationship had been strongly in favor of XLK since early 2019, but has now started to turn around, with the RS-Line coming out of a low and breaking the first short-term resistance levels while RRG-Lines are rapidly improving.

All in all, it looks as if the improvement for RYT vs XLK has only just begun, and it proves that sometimes you need to change lanes in order to stay on the right track.

#StaySafe, --Julius

My regular blog is the RRG Charts blog. If you would like to receive a notification when a new article is published there, simply "Subscribe" with your email address.

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With the move into Cyclical stocks continuing to expand, sectors such as Industrials have stocks with multiple reasons to continue to trade higher. In addition to industrial production reports, which just posted a fourth month of improvements, factory orders have also been steadily increasing, which in turn is helping select companies post better-than-expected fundamental reports.

The Industrial sector is quite varied, but, when scouting for areas of stocks poised to trade higher, one need to look no further than Aerospace & Defense, as this area has many stocks that have outperformed their peers after recently posting earnings and sales well ahead of estimates.

A quick review of top-performing S&P Aerospace and Defense ETF (ticker XAR) will yield some ideal candidates.

First up is Axon Enterprise (AAXN), which gapped up into a base breakout earlier this month following their report of 43% year over year growth for their 3rd quarter. In addition, their results were 100% above estimates while management guided sales numbers higher into year-end.

DAILY CHART OF AXON ENTERPRISE, INC. (AAXN)

The company manufactures and sells conducted energy weapons, such as those used by law enforcement to subdue or even film unruly individuals. The civic unrest that has occurred this year has the federal government as well as local police forces increasing their orders with AAXN.

The stock has been in a period of consolidation following its gap up on surprise earnings, and AAXN bullishly remains above its 10-day moving average. A break above its recent high of $127.5 would be even more bullish for a continuation rally.

Another top holding of the S&P Aerospace ETF (XAR) is Triumph Group (TGI), which also reported strong 3rd quarter earnings earlier this month. The company cited increased military orders, as well as a partial recovery in their Airbus program that had then posting results that were 53% above estimates.

DAILY CHART OF TRIUMPH GROUP, INC. (TGI)

In addition to bullishly gapping up on volume following its strong earnings report, TGI also broke out of a 5-month base after an add-on rally. The move pushed the stock back above its 200-day moving average, which in turn allowed the stock to advance further as it continues to find support at its upward trending 10-day moving average.

The good news surrounding the rotation into Industrial stocks is the fact that not only do these stocks do well during initial periods of an economic recovery, such as now, but many of them are posting unexpected growth prospects which support a continuation rally in this area.

My MEM Edge Report has identified additional stocks in the Industrial sector that are poised to trade much higher, including a Transportation Logistics provider, as well as a top supplier to reinvigorated Boeing (BA), which just received FAA approval for their downed MAX 737 aircraft.

In addition, subscribers to our bi-weekly report have been alerted to Growth stocks within Technology and Retail that are far outpacing the markets and poised for further gains. Use this link to see a sample report, and be sure and take advantage of our 4-week trial offer at a nominal fee.

Warm Regards,

Mary Ellen McGonagle - MEM Investment Research