DecisionPoint Weekly Wrap -- Participation Fading By Carl Swenlin | May 27, 2017
Last week I said that I was expecting the market to do a little more work on the downside before the bull market resumed, but the market had other ideas. Prices continued to rally, and on Thursday SPY broke to new, all-time highs. Volume expanded on that day, but it was still well below the one-year average of daily volume. Below we'll look at evidence that fewer stocks are participating in the rally.
The DecisionPoint Weekly Wrap presents an end-of-week assessment of the trend and condition of the stock market (S&P 500), the U.S. Dollar, Gold, Crude Oil, and Bonds.
STOCKS
IT Trend Model: BUY as of 11/15/2016
LT Trend Model: BUY as of 4/1/2016
On the SPY daily chart price is overbought in terms of its distance from the 200EMA and the rising trend line drawn from the February 2016 low. And, while price keeps moving higher, the overbought condition is impeding upward progress.
The weekly PMO turned up this week, but I have a hard time seeing a robust rise in the weekly PMO while overbought conditions exist.
Short-Term Market Indicators: Both of our short-term indicators are overbought and have topped. The STO-B (breadth) is near the top of its three-year range, and the STO-V (volume) is near the top of its one-year range. Nevertheless, this condition does not necessarily call for an immediate price top -- price could move higher for a couple of weeks before it corrects or consolidates. In the meantime the indicators should move back toward the neutral zone.
Intermediate-Term Market Indicators: The ITBM and ITVM are both rising in neutral territory, and they present no obstacle to price moving higher for a few more weeks.
Below is a chart with a longer-term perspective and it paints a less optimistic picture. The Bullish Percent Index shows the percentage of S&P 500 stocks that have point and figure BUY signals. Since the high reading at the end of February the BPI has fallen over 12 points, while price has moved to record highs. This means that there are fewer stocks participating in the rally now than there were three months ago. The two more severe divergences in 2015 show the kind of trouble to which this situation can lead. Q: How can price advance even though fewer stocks are participating? A: The larger-cap stocks carry more of the load.
Conclusion: We are riding a cyclical bull market within a secular bull market. My opinion is that the cyclical bull market began in February 2016, so there should be more than a year before the next bear market begins. That is something of a WAG (wild, audacious guess) based upon a textbook template of a 'typical' market cycle, which lasts four years from trough to trough. The bull market runs the first two-and-a-half years, and the remaining year-and-a-half is reserved for the bear market. We would be hard pressed to find recent, real-life examples that fit this template, but it is a handy rule of thumb.
As for the more immediate future, our short- and intermediate-term indicators suggest that we will see a few more weeks of rally before another correction/consolidation. Volume has been less than robust for at least a year, and participation has been fading since February. The bull market can overcome these issues for longer than we might believe, but we need to be aware of them. . .
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