Sentiment in the markets plunged to levels not seen since the March 2009 lows despite the market heading to new highs. Many pundits were confused by this given the market’s action; however, what was taking place was that cyclical sectors and small cap stocks were suffering pullbacks, which were being masked by the market averages heading higher as they were being carried by large cap defensive sectors like health care and consumer staples. Since the April pullback, we have seen a clear rotation out of defensive sectors and into cyclicals. This is a key development that may drive the market higher since cyclicals make up 70% of the S&P 500’s market cap while defensive sectors make up only the remaining 30%.
S&P 500 Member Trend Strength
As shown below, the outlook for the S&P 500 is clearly bullish as more than 60% of the 500 member-index have bullish short, intermediate, and long term trends. What is perhaps most important for the S&P 500 is that its long term health is incredibly strong given nearly 90% of its members have rising long-term moving averages.
S&P 500 Trend Strength
* Note: Numbers reflect the percentage of members with rising moving averages, 200d MA is used for long term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short term outlook.
Breaking out the 500 stocks within the S&P 500 into their respective sectors and viewing their long (200d SMA) and intermediate trends (50d SMA) shows the cyclical sectors are surfacing as short-term leaders as they possess the strongest short-term breadth (% of members above their 20 day moving average). The most important section of the table below is the 200d SMA column, which sheds light on the market’s long-term health. As seen in the far right columns, you have 89% of the S&P 500 members with rising 200d SMAs and 92.2% of its members above their 200d SMA with all ten sectors in bullish territory and more than 60% of their members having rising 200d SMAs. The two sectors showing the healthiest overall trend are the financial and consumer discretionary sectors as they have the best long-term and intermediate-term trends.
The defensive sectors were market leaders until recently as there is now a rotation away from defensive into offensive, or cyclical, sectors. Perhaps this is most evident when looking at theutility sector which has only 6.5% of its members above their 20d SMA while the industrials have 98.3%.
The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 500’s momentum, on a daily, weekly, and monthly basis for short, intermediate, and long-term trends. As seen in the table below, the momentum for the S&P 500 is bullish when looking at any time interval as the S&P 500 is on buy signals for each.
Digging into the details for the 500 stocks within the S&P 500 we can see that the daily momentum for the market continues to improve as the percent of stocks within the S&P 500 with daily MACD BUY signals was at 29% a few weeks ago and has since jumped to 75%.
The intermediate momentum of the market has also improved from a 55% reading on April 19th to 68% currently.
Perhaps most significant is that the S&P 500’s long-term momentum has improved to a one year high as 85% of stocks within the S&P 500 have monthly MACD buy signals.
Further evidence of the rotation out of defensive sectors and into cyclical sectors can be seen when viewing the weekly and daily % MACD buy signals for all ten S&P 500 sectors. Many of the cyclical sectors had the worse readings for weekly MACD buy signals while the defensives had the best. However, recent changes in market momentum shows the cyclical sectors having the greatest improvement at the expense of the defensive sectors.
% of Sectors with MACD Buy Signals
52-Week Highs and Lows Data
Confirming the data in the trend and momentum sections above, looking at new 52-week highs/lows data from a month ago to the present shows a clear rotation away from defensive sectors and into cyclical sectors. Below is the 52-week lows/highs snapshot from April 10th where nearly 29% of the S&P 500 members had reached a 52-week high over the prior trading week, and the utility, health care, and consumer staples were the clear leaders while the cyclical sectors had far fewer members hitting new highs.
(Data as of 04/10/2013)
The current makeup of new highs/lows is a polar opposite to a month ago. Currently 39% of the S&P 500 members hit a 52-week high this week with the cyclical sectors leading the charge where over 60% of the financial sector hit a 52-week high this week. In contrast, the defensive sectors all made fewer 52-week highs than the S&P 500 as a whole.
Back on April 10th the S&P 500 was at a 52-week high and 29% of the members in the index had reached a 52-week high over the prior five days. The S&P 500 is at/near a new 52-week high but this time around nearly 40% of the market is hitting a 52-week high, indicating a market whose health has improved, not worsened over the last month.
The market is perhaps in the best shape it has been in over a year when looking at its trend and momentum. As highlighted above, we have a major green light for the market as the S&P 500’s short to long-term trends are all bullish as are its short to long-term momentum.Perhaps the biggest development in recent weeks is the clear rotation away from defensive sectors and into cyclical sectors. This development is likely to propel the market even higher given 70% of the S&P 500 is made up of cyclical sectors. There is no erosion in either the market’s trend or momentum, and until we see erosion in the markets breadth and momentum the path of least resistance is clearly higher.
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Chris graduated magna cum laude with a B.S. in Biochemistry from California Polytechnic State University, San Luis Obispo. He joined PFS Group in 2005 and is currently pursuing the designation of Chartered Financial Analyst. His professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam. He manages PFS Group’s Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account. Chris also contributes articles and Market Observations to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava’s clients only—with other members of the trading staff. Chris enjoys the outdoors.