Health of the Market  (5/20/2017)

The charts will be updated by every Saturday. When no change to text, [NC] will be used. Click for favorite investment websites or to go to the Charlottesville Senior Center Investors' Forum. Note: To get tabs to other pages, Javascript (not Java) must be enabled for this site.

There have been strong earnings reported this quarter. Some 72% of S&P 500 companies have topped profit forecasts, well above the historic average of 66%. However, some say the stock market is overvalued. This table shows fundamental data for the S&P 500 and its sectors. The price to earnings ratio of the S&P 500 is 19.89, which is higher than the 18.10 reading a year ago. This from the Real Investment Report by Lance Roberts.

On Friday 98 NYSE stocks made new 52-week highs compared with 43 dropping to to 52-week lows and the S&P 500 was up 0.68%. It was down 0.38% for the week. "Bear markets come when we have a recession" stated Brad McMillan, chief investment officer at Commonwealth Financial Network. "That means focusing on news related to earnings, interest rate decisions and the health of Main Street workers." However, it is hard to ignor all the political news.

The indicators for the longer term equity market show an up market. On Friday, 70.0% of S&P 500 stocks were above their 200-day exponential moving averages, down from 71.0% the week before. 52.2% of these stocks are above their 50-day EMAs, down from 57.4% the week before. The index is up 6.38% YTD. 

The market in the typical month of May is usually good during the first week or so. But with the Trump administration, anything can happen. The charts for the first year of the presidential cycle compared to all years show this. We are in the Power Zone, the favorable time of the year. Access more data on the best six months here. A Bull Equity Cycle was confirmed as of 3/18/2016. The long-term BullHeal System went to a SELL on 5/19/2017 as we are no longer in the Power Zone. 

Health Sell Alert occurred on Wednesday 5/17 when the S&P 500 index droppend 1.8%. This is based on small-cap action. A VIX Buy Alert, based on large-cap action, occurred on Tuesday 4/25. The insiders are bullish (data from last Wednesday). The equity market tends to move on margin debt. This debt is at a high. See chart and read the latest here.


[NC]  Sector investing via exchange traded funds (ETFs) is popular. The traders rotate between sectors. To see how some popular sector ETFs are doing, click here for the Candle Glance


[NC]  Since December of 2016, the dollar ($USD) has dropped as long-term rates have gone down. The 10-year Treasury yield ($TNX /10) is shown with the price of oil ($WTIC).


[NC]  The international bond market is provided by the WSJ. See the Income tab for a chart of U.S. Treasury yields.

[NC]  The markets in other countries are quite well correlated to the U.S. market. To participate in these markets, the U.S. dollar can be hedged out. Click to check out the country hedged ETFs and the un-hedged ETFs.



[NC]  If the small-cap stocks do better than the large-caps, it indicates that the traders are willing to take on more risk. This trend to more risk continues, but with a pull-back the last few weeks as shown below. Watch this video to see how small caps may impact the market in 2017. The chart shows the relative strength of the Russell 2000 IWM vs the S&P 500 SPY. The 20/50-day EMA crossovers are marked by a pole.

The S&P 500 large-cap index, represented by the SPY exchange traded fund in the chart, touched a new high on Tuesday, and is still above its 50-day MA. The index is up 6.4% YTD. The ETF is up 10.1% in the six+ months since 11/9/2016 shown below. The Dow Jones Industrials is up 11.7% during that time. 

The Russell 2000 small-cap index, represented by the IWM exchange traded fund in the chart, is up 11.0% during the time shown. The strong support area in purple held and the index is just below its 50-day MA. This consolidation should be a base for another advance, however a break below this support might lead to a significant drop. 



The technology-heavy Nasdaq composite index, represented by its 100 largest stocks in QQQ, broke out of its two-month channel and hit an all-time high on Tuesday. It is up 17.2% since 11/9/2016 as shown -- a huge advance compared to the S&P 500. Last week it pulled back ending down 0.5%. It should go higher after a pull-back to the area of the breakout.


[NC]  The S&P 500 is shown with its Bollinger Bands below. When the price goes above or near the upper Bollinger Band a downswing in price is likely as the market is overbought. Similarly, when the price goes below the lower band, an upswing is likely.

[NC]  Also shown is the 21-day Money Flow Index. This is an oscillator that uses both price and volume to measure buying and selling pressure. It is similar to a volume-weighted version of RSI. A green pole is marked when the MFI moves above 50 indicating a good time to buy. If the MFI hits the oversold level at 20 (green dashed pole), it might be a better time to buy. A solid red pole when MFI goes below 50 indicates selling might protect from a downswing. A red dashed pole when the MFI goes near 80 might be good time to lock in profit. 

Health Alert

[NC]  Below is the Russell 2000 small-cap index that tends to lead the overall market both up and down -- as the small-cap stocks are generally more risky than large cap stocks. This index is shown with high-low-close bars. It's 50 and 200-day simple moving averages are included. The 200-day moving average often acts as support or resistance to price movement as many traders watch it.   

[NC]  The Health Alert is based on the momentum of the small-cap Russell 2000 index, the Nasdaq breadth data, and the Nasdaq 52-week new highs and new lows. The thresholds are described below.  The green buy and red sell 'alert' poles on the chart show when these alerts have occurred.

Health Sell Alert occurred on the 2.7% drop on Wednesday 5/17. This is shown by the red pole. The small cap stocks tend to lead the market and they have been weaker than the large caps over the last three weeks as shown in the chart above.  

[NC]  The second pane is the Relative Strength Indicator (RSI) for the Russell index, a measure of momentum of the market. This is the relative strength of the Russell 2000 itself -- it's not relative to any other index. Above 50 shows positive momentum over the last 21 days. The latest plot can be seen by clicking here. The green arrows indicate a positive change in momentum as the RSI crosses above 50; red arrows indicate downward momentum when the RSI crosses 49. The threshold of 49 is used to give a more definite indication of the start of a down-swing.  

[NC]  The third pane is the Nasdaq McClellan Summation Index, $NASI, (red) and it's 5-day exponential MA (blue). This is a running sum of the difference of two moving averages of the number of advancing issues minus the number of declining issues. A 19-day and a 39-day exponential moving average (EMA) are used. This shows whether a market move is broad based. As the trend changes, the red index will cross the blue EMA and an arrow will be drawn. This indicator must be consistent with the RSI before an alert pole is drawn on the price chart. When this index is below the 5-day EMA, and a 'sell alert' has not occurred, this is a warning not to purchase new positions, but to HOLD those that were bought earlier on the 'buy alert'.

[NC]  Dr. Alexander Elder in his book Trading for a Living says that the 52-week New Highs minus New Lows Index is "probably the best leading indicator of the stock market". This display for the Nasdaq market shows the this index in pink. The 3-day MA of the NH-NL index is shown in blue. A green arrow is placed if the 3-day MA of the NH-NL index goes positive for three consecutive days, or a red arrow is placed if the MA goes negative for three consecutive days. To see a summation of the NH-NL numbers, click here. When a green buy arrow is put on the price chart, it indicates a Health 'buy alert', if the other indicators concur. The red sell arrows here are not used in the determination to place a sell pole on the price chart, due to the lag.

[NC]  The Health Alert acts as a confirmation and does not do well as a stand-alone signal for buying and selling. After a long trend, it works well to signal the end of the trend.

Long-Term Overview

[NC]  This chart gives an overview of the situation. The market had done well since the termination of the QE3 Fed bond buying, until the last half of 2015. The 10-year Treasury rates moved down even when the Fed raised the very short term Federal Funds Rate in December 2015. There had been much flight-to-safety buying causing the rates to drop. There has been three rate increases, the last two in December 2016 and March 2017. Now there is an expectation of two more Federal Funds Rate increases this year. See more here. A chart of various Treasurys yields since 1962 are shown on the Income tab.



AmiBroker software with Yahoo data is used for the charts with black background. The source of the other charts is located on the upper right of the chart. This page is for amusement only, and should not be taken as advice to buy or sell anything.