Please Note: The next “Technical Analysis Update” will be the Technical Analysis Webinar, September 18, 2018 @ 4:15 PM EST.

A quip I read, written by stock market icon William O’Neil, stated, “We’re in the evaluation business. And that means we can only evaluate things in real-time and use our available technical tools to find the proper perspective.” Consistent with this, when I look at the percentage of stocks above their 50- and 200- day exponential moving averages in the Large, Mid- and Small-Cap spaces, along with nine S&P sectors (not including Real Estate and the new Communication Services sector), I arrived at the following conclusions:  

  1. The market is overbought on an index level, but not on a sector level. This means that if trading and investment dollars continue to rotate within the equity market, as opposed to coming out of the equity market completely, the odds favor a continuation of the primary uptrend.

  2. To synopsize a friend and Market Technicians Association colleague Dick Dickson, “Given the advent of instant news, it’s easy to get caught up in the day-to-day activity of the market and to integrate short-term ‘noise’ within the primary trend. Consequently, pay attention to the primary trend and realize that short-term market reactions are simply interruptions to the primary trend (my bolding)...” In other words, stay objective.

The conclusions above are based on readings from last Friday’s close (8/24/18):

Percentage of Stocks Above 50-EMA: On an index level (Large, Mid- and Small-cap) the readings were between 60% and 70%. On a sector level, seven of the nine fell between 60% (Financial) and 93% (Utilities - overbought). In my opinion, this is another way of discerning positive or at least acceptable, underlying breadth. Only two sectors were below 60%; Materials (45.8%) and Energy (45.1% - I think this is a very low bar for Energy, meaning it has room to run on the upside).  

Percentage of Stocks Above 200-EMA: On an index level (Large, Mid- and Small-cap) the readings were all at 70% or above (overbought). On a sector level, only four were above 70%; Industrials (75.7%), Technology (78.6%), Utilities (89.6%, the highest and most overbought), and Health Care (79.3%). Of the remaining five, Basic Materials was the lowest at 54.1%, followed by Consumer Discretion (63.7%, this area is gaining momentum), Energy (64.5%), Financial (64.7%) and Consumer Staples (65.6%).

Shifting gears and relative to the next chart of the S&P 500 (SPX/2896.74), due to the fact that the index is trading at a new all-time high there probably aren’t too many disappointed holders at this point. Consequently, it becomes more difficult to discern levels that may generate selling and/or profit taking.

As a result, let’s look at a momentum indicator called the Relative Strength Index (RSI). Besides using RSI as a means to confirm price trends and potential technical divergences, RSI can also be used to discern overbought and oversold conditions. Like many momentum oscillators, overbought and oversold readings for RSI work best when prices move sideways within a range. Normally, 70% is considered overbought and 30% oversold. However, when an uptrend exists, like now, Constance Brown interprets RSI differently. Her opinion is that within the context of an uptrend, the 90 level identifies an overbought condition and the 40 level identifies oversold conditions. When the chart below is viewed within this context, I think her interpretation is correct. In the chart below, the red horizontal line at the top marks the 90 RSI level. Therefore, while not overbought on a longer-term basis relative to the current uptrend, the SPX is moving towards what I would consider an overbought short-term condition of 70 on the RSI scale.

S&P 500 Large Cap Index Chart. S&P 500 1-year chart, with rising 200-DMA. Support levels highlighted above, in "green".

Since this is the last Tech Talk report until my Technical Webinar on 9/18/18 at 4:15 PM EST, here are some final thoughts:

  • I disagree with the recent media narrative of the “Longest Bull Market in History” because I think the equity market got washed out in 2015-2016. During that time period, over 63% of NYSE issues were down 20 percent or more. Furthermore, in 2011, over 70% were down 20 percent or more. Additionally, according to Raymond James and Associates, at the February 2016 lows the stocks in the S&P 500 were down an average of 25% from their own respective 52-week highs and the average Russell 3000 stock was down 35%.

  • Tactically, should stops be tightened? Yes. Should profits (partial or in full) be taken on stocks that are losing technical and/or fundamental support? Yes. But to say this is the “longest bull market in history,” which implies it must end soon, it must end now, or it must end at some random time, I don’t agree.

  • JP Morgan has labeled the 2800 level for the S&P 500 “earnings support.” This is interesting because technical support exists between 2800 and 2790. In other words, the two disciplines of fundamental and technical analysis are complementing each other, not competing.

  • JP Morgan feels that if the U.S. dollar should weaken and trade negotiations continue toward resolution, emerging markets are likely to have more upside than the S&P 500. While I agree mainly due to their oversold condition, from a technical viewpoint this may be a short-term observation as U.S. primary seasonality trends are typically stronger than the overseas primary seasonality trends into year-end.

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know if we can do any additional work for you. 

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 08.27.2018. Chart sources: 

PDF Copy of Article: Day Hagan Tech Talk August 28, 2018 (PDF)

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