Since my last post, the S&P 500 has declined by about -1.7%, pulling back to within earshot of when I became cautious in early November. The daily chart below shows the Index has retreated to an area of meaningful support with a rising trend line residing at about 1765 and the 50-day moving average at just above 1760.
Also note the continued bearish divergence in the MACD versus price (orange lines), but at least the stochastic is now oversold (green circle), suggesting risk of further downward pressure is less likely at this point or odds favor residual erosion being more tempered.
I've been asked, "what will get you more bullish in the near-term?" Longer-term the market (S&P 500) remains in a solid uptrend and we're currently approaching the sweet spot for seasonality, with mid-December through early January typically offering the best returns on average. But as for the short-term, I'd like to see a few things change starting with the MACD turning up and triggering a Buy signal (histogram meaningfully above zero) as well as the stochastic reverting up and getting through 50.
In addition, I would prefer to see small-caps begin to outperform larger-caps:
Since the start of October, the relative performance of the IWM vs. SPY (blue line in chart above) has been trending south. Although the relative return of small-caps registered a higher low more recently, to further indicate improving underlying breadth will require the IWM:SPY ratio to successfully break its down trend, which has yet to occur.
Another indicator that needs to reverse course is the percentage of NYSE stocks above their 50-day moving average:
This indicator has been trending down since mid-October, creating a bearish divergence as the S&P 500 has risen for most of that time. Currently just 45% of NYSE stocks are above their 50-day MA. To get more bullish in the near-term, I would want to see this indicator put in a bottom and get to above 50% minimum.
But the following chart exhibits at least an initial sign that the risk appetite for investors is perhaps ready to reignite:
The relative performance of cyclical stocks to staples (orange line) is one surrogate to measure the risk-on/risk-off bias; when the line is rising, the climate is risk-on and bullish for the market. Since early October, cyclical stocks have more or less been performing in line with staples. However, note that more recently the CYC:XLP relative return line is close to hitting a new high despite the S&P 500 losing ground -- perhaps a bullish divergence in the making.
The key focus for this week: to see if the S&P 500 can successfully hold at or above 1760-1765 support. I will be traveling tomorrow, but I promise to return with an update by mid-week.
(Source for all charts: Stockcharts.com)