When it comes to describing the stock market’s current condition and possibly its next directional move, a good friend of Day Hagan and my former colleague Jeff Saut, Chief Investment Strategist with Raymond James Financial, is known for saying (paraphrased), “It’s not whether things are ‘good’ or ‘bad,’ but whether things are getting ‘better’ or getting ‘worse’ that is important.” Considering this, let’s examine a few underlying technical indicators and discern if the underlying technical condition of the domestic equity market is getting better or worse.

As illustrated in detail during last week’s technical analysis webinar and shown below, various measuring tools using different metrics to measure stock market breadth signify broad participation in the current uptrend. They are thus supportive of higher equity prices going forward, despite any near-term declines or consolidation periods.

  • Advance-Decline Line analysis: While the Large Cap, Mid-Cap and Small Cap cash indices have either just now moved up to or slightly exceeded their price peaks from last November, they are still below their all-time highs recorded last year. However, the respective A/D Lines are all in new high territory—a positive tailwind for the equity market. Chart below.

  • Ned Davis Research (NDR) did a recent study, highlighted during last week’s webinar, showing the bullish implications when the percentage of stocks above the 50-DMA went above 90%. When NDR combined all the statistics, the mean return after 253 days (1 year) was +17.06% while the median return for the same time frame was +15.92%. Please let me know if you would like to see the details. Along the same line, while the percentage of stocks above their 200-DMA isn’t nearly as positive as the study referenced above, the readings are improving and signify there is a bit further to run. Chart below.

  • In my experience, comparing the current number of new 52-week highs against where they were historically isn’t the best timing tool. However, comparing the current number and direction of new 52-week highs with the movement of the cash indices can be helpful in confirming (bullish) or not confirming (bearish) the direction of the cash indices. Currently, the number of new 52-week highs for all capitalization sizes is above the November/December 2018 peak readings, and the highs are acting better than their respective cash index—supportive of equities. Chart below.    

 Summary: At this point in the move up off the late-2018 low, as Jeff Saut recently stated, “The pace of the rally should slow.” However, still-supportive breadth readings suggest that declines will be contained by a range of support for the S&P 500 (SPX/2796.11) of between 2731 and 2613. Finally, a close above 2816 would increase the odds of a move towards 2940 (September-October 2018 peaks). SPX chart not included.

S&P 500 Large Cap A/D Line. S&P 400 Mid Cap A/D Line. S&P 600 Small Cap A/D Line. NYSE Common Stock Only A/D Line.
Percent NYSE Stocks > 200-DMA. Percent S&P 500 Stocks > 200-DMA. Percent Mid Cap Stocks Above 200-DMA. Percent Small Cap Stocks Above 200-DMA.
NYSE Common Stock Only - New 52-Week Highs. S&P 500 New 52-Week Highs. S&P 400 Mid Cap - New 52-Week Highs. S&P 600 Small Cap New 52-Week Highs.

Last-minute Chart of Interest: Sentiment. Experience has taught me that sentiment indicators are better at discerning equity market bottoms versus equity tops. In addition, sentiment indicators are best used in conjunction with other market-based indicators and not on a “standalone” basis. That said, if there is one “fly in the ointment,” it concerns sentiment. Currently, the 10-day total CBOE Put/Call ratio (0.83) has dropped close to 0.77 and near an area that implies the reemergence of complacency—excessive optimism. 

CBOE Options Total Pull/Call Ratio Index Five Day Average Chart.

Day Hagan Asset Management thanks you for allowing us to be part of your success!  


Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 02.25.2019. Chart sources: StockCharts.

PDF Copy of Article: Day Hagan Tech Talk February 26, 2019 (PDF)

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