Posted | by David Moenning |
Are There Cracks In The Foundation? image

Executive Summary:

The question from our last technical review was if the stock market was "breaking out" to the upside. Cutting to the chase, the answer depends on what "market" you are looking at. To be sure, both the S&P 500 and NASDAQ 100 have broken out their recent consolidation ranges and are now trending higher. However, small-caps, mid-caps, and any index relating to value are clearly stuck in a range - likely waiting on signs that the economic recovery will actually show up.

The State of the Trend Indicators

About The Trend Board Indicators: The models/indicators on the Trend Board are designed to determine the overall technical health of the current stock market trend in terms of the short- and intermediate-term time frames.

The Trend board scores a perfect 10.0 again this week as all the models/indicators are both on buy signals and rated positively. From a weight-of-the-evidence standpoint, there isn't much to complain about here.


NOT INDIVIDUAL INVESTMENT ADVICE.
View Trend Indicator Board Online

The only nagging concern is that outside of the APPL, AMZN, and the rest of the COVID Winners, there doesn't appear to much enthusiasm behind the move. Analysts of all shapes and sizes these days are saying the market is experiencing "narrow leadership," which is a condition that usually ends badly.

However, my view is that given the COVID world we now live in, the universe of companies that can "grow" is much smaller than normal. And at the same time, the pool of capital looking to invest in "market leadership" is larger than ever. As such, the concentration in the COVID Winners, while extraordinary, looks to be relatively normal for this "new normal" world.

So, until the economy can find "normal" again, this is likely the way the game will continue to be played.

My Take on the State of the Charts...

The most bullish thing a stock or index can do is make new all-time highs. So, as far as the S&P 500 and NASDAQ/NASDAQ 100 indices are concerned, the bulls remain large and in charge as the trend is clearly an investor's best friend here.

S&P 500 - Daily

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NASDAQ 100 - Daily

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However, the song does not remain the same when one gets away from megacap growth names. As I mentioned above, the small-caps, mid-caps and value names remain range bound. And while these indices do perform well on days when traders focus on economic improvement, the trend remains largely sideways.

iShares Russell 2000 ETF (IWM) - Daily

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Next, let's check in on the state of the market's internal momentum indicators.


View Momentum Indicator Board Online
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.

Given the perfect 10.0 seen on the Trend Board, one might expect to see the Momentum Board sporting more green than it currently does. In short, if we were seeing a broad-based market advance, the board would likely be universally green. However, since there are divergences between the megacap COVID Winners and the broader market, I'm not surprised to see some cracks in the foundation from a momentum standpoint.

Thought For The Day:

Success is getting what you want. Happiness is wanting what you get. - Dale Carnegie

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: AAPL, AMZN, IWM - Note that positions may change at any time.

Trend Models Explained

Short-Term Trend Model: A series of indicator designed to identify the status of the stock market’s short-term (0-3 weeks) trend. The model compares the current price of S&P 500 relative to 5-day customized smoothing (weighted and moved forward 3 periods), the relationship of the 5-day to the 10-day, and the relationship of 10-day to 39-day.

Short- and Intermediate-Term Channel Breakout Systems: The short-term and intermediate-term Channel Breakout Systems are modified versions of the Donchian Channel indicator. According to Wikipedia, "The Donchian channel is an indicator used in market trading developed by Richard Donchian. It is formed by taking the highest high and the lowest low of the last n periods. The area between the high and the low is the channel for the period chosen."

Intermediate-Term Trend Model: A model designed to identify the status of the stock market’s intermediate-term (3 weeks to 6 months) price trend. The model compares the current weekly price of S&P 500 relative to relative to customized 10-week smoothing (weighted and moved forward 3 periods), the relationship of the 10-week to the 30-week, and the relationship of 30-week to 55-week.

Long-Term Trend Model: An indicator designed to identify the status of the stock market’s longer-term (>6 months) trend. The indicator compares the 50-day smoothing of the S&P 500 relative to its 200-day smoothing. When the 50-day is above 200-day, the indicator is positive and vice versa.

Cycle Composite Projections: The cycle composite combines the 1-year Seasonal, 4-year Presidential, and 10-year Decennial cycles. The indicator reading shown uses the cycle projection for the upcoming week.

Short- and Intermediate-Term Trading Mode Models: These indicator attempt to identify whether the current market action represents a "trending" or "mean reverting" environment. The indicator utilizes the readings of the Efficiency Ratio, the Average Correlation Coefficient, and Trend Strength models.

Momentum Models Explained

Short-Term Trend-and-Breadth Model: History shows the most reliable market moves tend to occur when the breadth indices are in tune with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. At the time of this writing, when the A/D line has been above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +26.5% per year since 1980. When one of the indicators is above its smoothing, the equity index has gained at a rate of +14.5% per year. And when both are below, the equity index has lost over -20% per year.

Intermediate-Term Breadth Model: A proprietary diffusion index developed by Ned Davis Research. The indicator is designed to determine the technical health of the market’s 157 sub-industry groups (GICS categorizes the market into 11 sectors, 20 industries, and 157 sub-industry groups). Technical health is determined by the direction of each sub-industry’s long-term smoothing and the rate of change of the sub-industry’s price index.

Short- and Long-Term Volume Relationship Models: These models review the relationship between "supply" and "demand" volume over the short- and intermediate-term time frames.

Intermediate-Term Price Thrust Model: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average.

Intermediate-Term Volume Thrust Model: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume to the 10-day total of daily declining volume. The indicator supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions.

Breadth Thrust Model: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. Historically, the NASDAQ Composite has performed much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust.

NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and Heritage Capital Research and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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