SPX is now back to within 1% of the top of its trading range from October to early December. It would be very surprising if SPX did not encounter some resistance as it nears 2790-2810. That is made more likely by the fact that consecutive weeks of gains, while bullish longer term, have most often been followed by a period of consolidation and retracement.
The longer term outlook continues improve. Equal weighted indices, which remove the influence of a few, large companies, are outperforming their traditional market capitalization weighted peers. The Nasdaq index, normalized to reduce the influence of FAANG, is just 1.5% from a new all time high (ATH). If those big companies kick into gear, the traditional indices will likewise move back to their ATHs.
The primary characteristic of this rally has been broad participation. This week, the cumulative advance/decline line for the very broad NYSE made a new ATH . This did not happen during any bear market rally over the past 40 years.
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Since Christmas Eve, SPX is up 19%, NDX 20% and RUT 23%. NDX, RUT and DJIA have each risen the past 8 weeks in a row (table from alphatrends.net). Enlarge any chart by clicking on it.
Notice how SPX hesitated after entering the bottom of the range (at 2600) in January. That would be a bullish scenario now as SPX approaches the top of this range: a "handle" to put on the "cup" formed during the December plunge and subsequent v-shaped recovery.
The primary characteristic of this rally has been broad participation. This rally is not being led by a few large companies. SPX (market cap weighted) has not broken out of its prior range, but the equal-weight index has.
Likewise, the equal weight Nasdaq broke out two weeks ago. It is now within 1.5% of its all-time high (ATH). Put another way, FAANG stocks are holding the index back; given their heavy weighting, if they kick into gear, the traditional indices will likewise move back to their ATHs.
Transportation indices have been strong. Railroads made new ATHs this week.
The trucking index closed above its range from October to early December on Friday.
In an early January post we wrote that this "does not look a bear market" (here). Part of our rationale was that early momentum was unusually strong: in the past 70 years, this had never taken place within the context of a bear market. In fact, momentum like this has often been associated with the start of new bull markets. An example of the strong forward returns is presented below. A month after "breakaway momentum" had triggered, SPX was up almost 5%, a condition that has always lead to continued gains 3, 6 and 12 months later (from Walter Deemer and Coynefucius).
Likewise, the McClellan Summation index (another measure of breadth momentum) rose to +1000 this week (discussed here last week). This did not occur during either the 2000-02 or 2007-09 bear markets. According to Sentimentrader, reaching +1000 has led to positive returns in SPX over the next year 27 out of 28 times (a 96% win rate; to become a Sentimentrader subscriber and support the Fat Pitch, click here).
In the past 20 years, there have been 12 instances in which NYSI has exceeded +1000. SPX closed higher at least once within the next 4 months every time. A year later, SPX was higher every time by a median of 13% and by a minimum of 5%. A 5% gain from Friday's close would put SPX back at its ATH from September (table from Steve Deppe).
Also on Friday, the cumulative advance/decline line for the very broad NYSE made a new ATH (top panel). This did not happen during any bear market rally over the past 40 years, including during the ultra-outlier 1987 bear market (vertical red lines). For those who see the current rally as similar to the one at the end of 2015 before the early 2016 plunge, note that the A/D line came nowhere near an ATH during that period, even though SPX came within 1% of an ATH. All instances since 1980 are shown below.
The rally since Christmas has been almost entirely uncorrected. There have been only two days with more than a 1% fall. This has happened only 6 other times in the past 65 years. It's a small sample, but the index was higher 2 months and 6 months later every time. Only 1987 showed a negative return after a year but that came after the index had already gained more than another 15% (table from Troy Bombardia).
But in other respects, the current rally seems most likely to take at least an interim pause, during which gains are consolidated or partially given back.
First, there have been 10 other instances in which SPX fell 20% in 3 months. The current rally off that low is not only tracking above the median but at the top of the range for all 10. If past is prologue, SPX could chop sideways well into spring (yellow highlights) before resuming its upward recovery). This consolidation might coincide with SPX encountering some resistance at the top of its October to early December range (from Goldman Sachs).
Second, SPX has closed every week higher than it opened for 8 weeks in a row. In the past, the index was higher 6 weeks later in all but 1 instance (a 93% win rate). But in the interim 6 weeks, it has closed lower at least once in all but 3 instances (an 80% lose rate); in the past 50 years, only 1985 continued to sail higher (a 91% lose rate). In other words, a period of consolidation/retracement ahead is high odds (next two tables from Steve Deppe).
Likewise, NDX has closed higher 8 weeks in a row. In the past 50 years, it has closed higher again within the next 3 months in 86% of all instances. But during those next 3 months, a period of some consolidation/retracement occurred in 68% of instances (weekly closing basis).
Want to short this rally? Your best set up would be a pop in SPX above 2800 with, preferably, a drop in volatility so the term structure is near 80% or less.
Despite a strong 8 week rally, sentiment amongst analysts has not rebounded very strongly, yet (blue line). Bulls climbed back to just 56% this week; rallies in the past 8 years have not fizzled out until bulls were at least 65% (like late-2015 before the second swoon in early 2016). It would be unusual for there to be much downside until sentiment improves further (from Helene Meisler).
Similarly, fund managers' are not bullish. This month, BAML reports that they are overweight cash by the most in 10 years, their global equity allocation is at a 2-1/2 year low and their profit and macro expectations are the most pessimistic in 10 years. A new post on all of this is here.
It's true that US macro data has become decidedly ambiguous in the past few months. Real retail sales in December grew just 0.3% yoy. Industrial production fell 0.6% mom in January. This looks weak until you remember that industrial production was at an ATH in December, real retail sales were at an ATH in November and 2018 was the 2nd best year for new employment since 2000. An excellent, balanced take on the state of US macro from Tim Duy is here.
On the calendar this week: the Presidents Day holiday on Monday; housing starts and FOMC minutes on Wednesday; durable goods on Thursday. Due to the government shutdown, delayed data will be released over the coming weeks (from IBD Investors; for a trial subscription, please use this link).
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