Stocks appear to have turned their backs on the January-June bear market as sharply improved market breadth suggests that bulls are in it to win it, notes Jon Markman, editor of Strategic Advantage.
In our data junkie feature, you’ll learn more details suggesting a recovery might finally be underway.…However, we have half of one eye on the exits in case bears figure out how to get their act together and repel the advance.
ObservationsBears were hoping for some relief on Friday following the reversal lower the previous session. They didn’t get it. The S&P 500 (SPX) opened sharply higher and buyers never looked back.
The benchmark index closed at 4,280, a gain of 1.7%. The S&P 500 is up 9.7% since July 27 when the index pulled back to the 50-day moving average. More importantly, bulls built momentum despite the Federal Reserve raising interest rates, and a barrage of weakish corporate Q2 earnings reports.
Stocks are climbing the proverbial wall of worry. The gain Friday puts the benchmark only 50 points from critical overhead resistance at 4,330, the 200-day moving average. Bears are likely to concede a test of that level this week, and they better pray bulls are turned back.
Ultimately, the S&P 500 should push through its 200-day average, yet the smart trade this week is to take profits into strength. Important support for the S&P 500 is 4,090.
SA TradeViewWe added the ProShares Ultra QQQ (QLD) on Thursday at $54.70. The double-leveraged exchange-traded index fund closed Friday at $56.90, up 4.0%.
Now set up to sell QLD at $66.60 and set stop at $50.30 stp, effective anytime.
Our order to buy the ProShares Ultra S&P 500 (SSO) did not fill; cancel the order.
Consumer discretionary and technology led the gainers, with all sectors in the green on Friday.
Breadth favored advancers seven-two, and there were 129 new highs vs 55 new lows. The leaders were Automatic Data Processing (ADP), Cigna (CI), ICICI Bank (IBN), Synopsys (SNPS), and Centene (CNC). Pretty good leadership, but it will get better. Preliminary results for August showed the University of Michigan's consumer sentiment index climbed to 55.1 from 51.5 in July. Market expectations were for an increase to 52.5. The improvement is kind of shocking. The expected year-ahead inflation rate fell to 5%, the lowest since February, as energy prices continued to decline, the survey showed.
There are "signs of inflation cooling" as "investors anticipate a slower rate of US interest rate hikes," a research note from DA Davidson said on Friday. The US ten-year yield slid 4.6 basis points to 2.84%. West Texas Intermediate fell 2.6% to $91.90 a barrel.
Meanwhile, San Francisco Federal Reserve President Mary Daly said her base case for September's Federal Open Market Committee meeting is a 50 basis-point increase in the federal funds rate, according to DA Davidson. Daly, however, cautioned the Fed plans to stay data-dependent and has an "open mind" about a big increase.
There is a nearly 56% probability of a 50 basis-point rate increase on September 21, while 45% of market participants are pricing in a 75-basis-point rise, according to the CME FedWatch Tool. Mind you, these are incredibly big responses; the central bank is on the case.
In company news, Illumina (ILMN) sank 8.4%, the worst performer on the S&P 500 after it reported late Thursday a steeper decline in second-quarter adjusted earnings than the market had anticipated.
Broadridge Financial Solutions (BR) on Friday reported fiscal fourth-quarter results above analysts' estimates but expects profit growth to slow in the ongoing fiscal year as rising rates add to its interest expense. Its shares jumped nearly 8%, the biggest gainer on the S&P 500. Great company and stock; almost back to its all-time high after this move.
Data Junkie Update
The S&P 500 has had quite an impressive run lately with a 15% gain since the mid-June low. While the index remains more than 10% below its all-time high set in January. Bespoke Investment Group analysts put together some data that shows how strong and widespread the gains are.
The first is the S&P 500's cumulative advance/decline line tracked by Bloomberg. This indicator adds up the daily number of advancers minus decliners over time and is used to gauge underlying breadth during rallies and declines. Notably, Bloomberg's cumulative A/D line made a new high late last week even though the S&P 500 would need to rally 13% to get back to new highs. The analysts point out that this represents a significant positive divergence between breadth and price.
The second development that stands out is the percentage of S&P 500 stocks trading above their 50-day moving averages. This reading dipped below 2% back on June 16 but has risen up to 88% in less than two months, a massive change. Note that 88% is the highest level seen since the spring of 2021.
On June 17, one day after the June low was set, Bespoke highlighted an extremely low reading in the percentage of stocks above their 50-day moving averages. Past low readings (sub 2%) going back to 1990 had always come towards the very end of significant market pullbacks, and forward performance over the next six and twelve months was remarkably positive. The S&P 500 has been higher in the year after sub-2% readings every time with substantial gains in most instances. Given the bounce we've already seen since the June 16 low, this time looks similar to the late 2011 and late 2018 occurrences.
Getting back to the new high in the S&P 500's cumulative A/D line, there have only been four other periods over the last 20 years where the A/D line made a new 52-week high while the index itself was still more than 5% below its 52-week high, according to the Bespoke study.
These came in June 2009, March 2016, April 2018, and January 2019. While it's a small sample size, forward performance following these prior breadth divergences has been universally positive with gains 100% of the time over the next one, three, six, and twelve months, according to the BI study.
The bottom line is that current conditions resemble the start of a new bull market more than a dead cat bounce or kickback rally in a broader bear cycle.