Health of the Market  (7/11/2020)

The charts will be updated by   every Saturday. When no change to text, [NC] will be used. Click for favorite investment websites or go to Charlottesville's The Center Investors' Forum. Note: If the latest date does not show here or on charts, try reloading the page or clearing cached images.


The S&P 500 hit an all-time high on Wednesday 2/19/2020. Then a steep 23-day drop of 35% occurred putting the market into bear territory with a low point on 3/23/2020. It is down only 1.51% from its record high. The indicators for the equity market are recovering and show an up market within a bull cycle in a bull trend, and in a bull market. (see definitions on Longer Term page). The bull market was signaled by the move of the Nasdaq composite index to an all-time high on Wednesday 6/10/2020.

The S&P 500 index closed up 1.76%% last week. The Nasdaq index was up 4.01%.  The small caps were down -0.77%. 

47.2% of S&P 500 stocks were above their 200-day exponential moving averages, down from 49.2% the week before. 58.2% of these stocks were above their 50-day EMAs, down from 66.0% the week before. 55.6% of Nasdaq stocks were above their 50-day EMAs, down from 62.6% the week before (see chart)

[NoChange]  In March 2009, job losses were rising, bankruptcies were continuing apace, and corporate earnings were in the gutter. But that’s when the new bull market started – even though the recession didn’t end until July 2009. It is impossible to say when the virus will come under control and when consumers will return to normal behavior, but it does seem clear that stocks will make their move well before any of that happens. -- Zacks Steady Investor 3/21/2020

[NC]  "Okay, okay, okay, we get it. Avoid the beaten-down stocks. But you certainly wouldn't chase the strong stocks after this huge rally, would you? What about that retest of March 23rd lows?"  We're not retesting the March 23rd low, it's not happening. Everyone is calling for it and that makes it much less likely to happen. I've been saying in recent weeks that you will not see the S&P 500 at 2191 ever, ever again in your lifetime. To answer your first question, yes chase the leaders. If you think you'll see them back at March levels, I have a bridge I'll sell ya. The leaders are leading because they have been able to adjust to this crisis and still grow their earnings. -- Tom Bowley 5/9/2020

[NC]  The CNN Fear & Greed Index gives an interesting perspective on the internals of the market. The trend of the components of this index are important to gauge the trends of the market.

[NC]  A Health Buy Alert based on small-cap action occurred on Monday 5/18 -- three days after the Sell Alert. (see chart below).  A VIX Buy Alert, based on the volatility of large-cap action, occurred on Wednesday 7/1 (see Status page).

[NC]  The percent moves by some primary funds are shown ranked by their 5-day gain. In addition to the one-year return, the one-year maximum draw down is included. The Profit Factor is a risk-adjusted return as defined below.  (Chart from FundBuster.com.)


[NC]  A measure to determine if the price is too high relative to the underlying earnings is the Shiller price to earning ratio. This is the current price divided by the 10-year average of "real" (inflation-adjusted) earnings. This ratio corresponds quite well to the peaks of price as shown by charts on this site.

[NC]  John Murphy of StockCharts.com asks "Why do we look at charts? - They provide the most up-do-date information on the state of the stock market. They may also be telling us something about the fundamental reports we won't be getting until early next year. Charts track forward-looking markets, while fundamental data is backward looking. It's always safer to look out of the front window of your car while driving to see where you're going. Not the back window that shows you where you've already been."

[NC]  A chart from 1870 that shows the relationship between the market and its long-term regression line can be seen here.  It is way above the line, which means it may at some time revert back to that line.

[NC]  A Bull Cycle began on 6/1/2020. A chart showing the relationship between the stock and bond markets is on the Market Cycles page. The stock market is favored over the bond market.  A new bull market is considered to have started (by me) when the Nasdaq Composite index made a new all-time high. This occurred on 6/10/2020. The charts for the fourth year of the presidential cycle are shown on the Cycles page. June is typically a good month in the fourth year or in general. The Power Zone, the favorable time of the year, is over with the Circuit Breaker Sell Signal on 2/28/2020. Another Circuit Breaker Sell signal occurred on Thursday 6/11/2020.  The Power Zone typically starts sometime in October and ends sometime in May. See the Market Cycles page for more. The long-term BullHeal System went to a buy on 10/23/2019, but the recent market action caused it to go to a sell on 3/6/2020.



[NC]  Since late March 2018, with a few dips, the dollar ($USD) increased in value with respect to a basket of other currencies. The 10-year Treasury rate ($TNX /10) rose to a peak on 10/5/2018 and again on 11/8 closing at 3.23% both times. Now it has dropped significantly as the dollar gets stronger. The 10-year Treasury rate and the dollar are shown in a 6-year chart with weekly closing prices.

[NC]  The driving force between currencies is the relationship between global interest rates. The 10-Year Treasury yield remains higher than other developed-country yields. The rising dollar has a negative influence on the U.S. market, especially large cap multinationals as business overseas is more expensive. 

[NC]  Ed Yardeni in the 2/9/19 Barron's stated that, based on his 40 years of experience, he has never found that supply-versus-demand analysis helped much in forecasting bond yields.  It's always been about actual inflation, expected inflation, and how the Fed was likely to respond to both.


[NC]  Also shown is the CRB Commodities Index, which is a measure of inflation. This index is an unweighted geometric average of prices across 17 commodities including energy, grains, industrials, livestock, precious metals, and agriculturals. A rising dollar hurts commodity prices.


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


[NC]  The stock 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. Note that BSE SENSEX is an India index, CAC 40 is France, FTSE 100 is a UK index, Nikkei 225 is Japan, Hang Seng is Hong Kong, DAXK is Germany, and Shanghai is, of course, Shanghai.


[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 of two-month charts. The charts include the StockCharts Technical Ranking (SCTR). The sector ETFs used in the Candle Glance are these.

[NC]  Here is a map of popular ETFs arranged in significant groups.  This link gives gain or loss in a week with a small chart when you hover over the group.

[NC]  The S&P 500 index is shown with its gray Bollinger Bands below. The bands are two standard deviations above & below a 20-day simple moving average. When the price goes above or near the edge of the upper Bollinger Band a downswing in price is likely as the market is overbought. Similarly, when the price goes below the lower band, the market is oversold, and an upswing is likely. The 14-day RSI is a measure of the price momentum. Below 50 is negative momentum. A divergence with price (see Nasdaq chart) is an indication that the price trend is likely to change.

A correction of the extreme downswing has occurred with the index in the second consolidation area.. The index dropped back to its 200-day MA, which did act as support.

The Russell 2000 small-cap index (shown by IWM) hit an all-time high of 170 on 8/31/2018, and it hit that again on 1/17/2020. Then the small cap stocks dropped much more than the large company stocks, and the correction to that drop has been more powerful. Now a second consolidation is occurring below its 200-day MA, and the small caps have been weaker than the large caps.


The technology-heavy Nasdaq composite index made a new all-time high on Friday 7/10. The 14-day RSI is approaching an overbought condition.


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, 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.

[NC]  A Health Buy Alert occurred on Monday 5/18 as all three indicator are above their thresholds (as shown by the green arrows). If the RSI drops below 49, a Health Sell Alert will occur. The small cap stock ETF is used here as small-caps have tended to lead the market both down and up.   

[NC]  The second pane is the Relative Strength Indicator (RSI) for the Russell 2000 ETF, a measure of momentum of the small-cap 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 has two plots. The first 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. Arrows show the change in trend.

[NC]  The second plot in the third pane is the Nasdaq McClellan Oscillator, $NAMO. When it is above zero, the Summation Index is moving  up. When below zero the index is moving down.

[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 chart 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]  The Federal Reserve controls the Federal Funds Rate, which is the interest rate at which banks lend reserve balances to other depository institutions overnight on an uncollateralized basis. It also tends to effect longer-term rates. This chart gives the recent history of rate changes.


[NC]  The chart below 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 as the Fed raised the over-night Federal Funds Rate in December 2015. There have been a total of nine 1/4 point rate increases, the last one in December of 2018. The Fed cut the rate at its July 2019 meeting, and more cuts followed that as shown above. A chart of various Treasury yields since 1962 are shown on the Income tab.

[NC]  The Fed had been continuously reducing their inventory of bonds, which is quantitative tightening (not shown on chart), but terminated this. On October 9, 2019, the Federal Reserve announced a resumption of quantitative easing (QE). Fed Chairman Jerome Powell went to great lengths to make sure he characterized the new operation as something different than QE. Like QE 1, 2, and 3, this new action involves a series of large asset purchases of Treasury securities conducted by the Fed. The action is designed to pump liquidity and reserves into the banking system. Since the drop that started the bear market the Fed has been flooding the market with money that acts as liquidity.

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The source of the 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.