Patience Still Warranted -- For Now

I've returned, glad to be back. While I was gone the S&P 500 declined by -2%, one of its worst weeks in quite some time. On July 31st, I wrote that while some bearish divergences were developing, there still remained more than a few healthy bullish confirmations in place or at worse were neutral, and that patience was in order. Based on what I follow, I continue to believe that at this time patience is still warranted -- for now.

Let's first look at a daily chart of the S&P 500 Index:

All rising trend lines remain intact, and over the years the trend lines have become steeper as the market has abruptly accelerated in late 2011 and again late last year. Support can be found in the 1635-1650 range based on the most immediate trend line residing at about 1635 and the prior highs in May of around 1650. The 50-day moving average (blue line) -- though recently breached -- serves as further support in the 1650 area.

The chart above plots the relative return of the S&P 500 versus the Russell 2000 Index (red line), with the S&P 500 shown in the background (black line). As discussed here many times, in general it's bullish (risk-on) for the market when smaller-caps are outperforming larger-caps -- a relationship that's readily apparent in the chart. For the most part, small-caps have been outperforming since late last year and although most recently this trend has stalled and shows signs of reversing course, it has yet to do so in a meaningful way (when it comes to technical analysis, I've learned it's important to let things play out, i.e. do not attempt to anticipate what will or could happen and act with an itchy trigger finger).

The chart above shows the relative return (red line) of the Morgan Stanley Cyclicals Index versus Consumer Staples (XLP), with the S&P 500 (black line) in the background. A rising CYC:XLP line infers a risk-on environment, typically bullish for the market. As I've discussed in the past, when the CYC:XLP line has crossed up through its 100-day MA (meaningfully), the market has tended to do well and vice-versa, when the CYC:XLP line has breached its 100-day MA the market has tended to not do as well. Currently this indicator remains above its 100-day MA and more so it's interesting to see that as the market has receded in the past several days, the CYC:XLP has climbed to a new multi-week high, a bullish inference.

I've also discussed the above chart in the past, which shows in the upper inset the relative performance (dotted line) of the S&P 500 versus the mortgage REIT Annaly (NLY). The blue arrows on the S&P 500 (black line) are buy and sell signals triggered by the MACD for the SPY:NLY relative return. With the MACD histogram continuing to be well above zero, the S&P 500 remains bullish or in buy mode.

Above is another chart discussed on this blog in the past, it shows the relative return (red line) of high yield "junk" bonds (HYG) versus T-bonds (TLT). A rising HYG:TLT line is generally bullish for the market as it infers risk-on behavior. As shown above, note that a breakdown in the HYG:TLT trend line has frequently given a decent heads-up for an impending stock market correction (and vice-versa for breakouts above a declining trend line, suggesting the market should rise). That said with this recent market decline, the HYG:TLT line has actually risen and is quite far from breaching its rising trend line to the downside.

The chart above shows the percentage of NYSE stocks above their 200-day MA (red line). Currently this indicator is at 59%, which is still a fairly high number but what's worrisome is the gradual decline of this indicator YTD. The percentage of stocks above their 200-day MA peaked in January-February and has been making lower highs as the market has risen to new highs. Such a bearish divergence can exist for an extended period of time with no negative outcome. However, the longer it remains in place and develops the more concerning it becomes for the fate of the market, and it's been diverging for about seven months now.... 

Finally, the above chart shows the NASDAQ Summation Index (NASI, lower inset), with the S&P 500 (upper inset). I prefer to use the NASDAQ as it often leads the S&P 500. When the NASI pierces up through 400, it's a buy signal which then remains in place until the NASI pierces down through -400, triggering a sell signal. As I always say, no indicator is perfect, but this one has done a reasonably good job at being on the right side of the market's intermediate trend. A buy signal was triggered in January and with the NASI currently at 306, a sell signal is still quite a ways off.

In summary, bearish indications do indeed exist and are cause for concern, yet several indicators and charts remain bullish. I've only shown a handful of the charts I keep tabs on, but the point is the near-term picture is mixed regarding the market. I maintain patience and for now the intermediate trend continues to be up. As always, stay tuned.

(Source for all charts above: Stockcharts.com)