Wednesday, October 16, 2013

Stock market outlook remains bullish near-term, but bearish divergence developing longer-term

The stock market (S&P 500) continues to look bullish in the near- to intermediate-term.


Source: Stockcharts.com

The daily chart above shows the S&P 500 successfully held at the lower threshold of an ascending channel and currently resides at about the midpoint within the channel. It's good to see the Index has now spent three days above the round number 1700, the approximate previous high at the start of August. The stochastic is currently overbought at a reading of 90, but a newly-extended stochastic is common at the start of a move higher within an uptrend. Note also the MACD recently registered a buy signal, which have been timely in the recent past.

To give a better sense of which way the risk-on/risk-off pendulum has been swinging of late, I submit the following three charts.



The chart above shows what has been working since the market low of late August. Clearly, risk-on has been outperforming as 1) smaller-cap stocks have outperformed larger-caps, 2) high-yield "junk" bonds have outperformed T-bonds, and 3) cyclical stocks have outperformed staples.

But what does this exhibit look like since the market peak in September?



Interestingly, despite the S&P 500 decline, which typically translates into risk-off assets doing better than their risk-on counterparts, the chart above shows the opposite. The S&P 400 and 600 have actually appreciated in that time with junk bonds outperforming T-bonds and cyclical stocks holding up better than the more conservative staples.

Finally, the following chart shows results for this most recent rally.



Once again, and not surprisingly, risk-on has outperformed risk-off. In sum, the three charts collectively depict a bullish backdrop for the market.

I would mention that longer-term there is a negative divergence developing that is concerning.



The weekly chart above shows the S&P 500 and its MACD. Note that as the Index has climbed this year, the MACD has been trending down -- a bearish divergence. In the past, such a negative divergence has often resulted in equities suffering a correction, in some cases quite a drastic one at that (2008!). It's still too early to make any sort of definitive call on this looming development, and late last year a similar bearish divergence appeared only to result in a fairly mild correction before the Index resumed its ascent. Price has yet to confirm this divergence, but it's definitely something worth keeping in mind.

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