'Everything Is Not Rolling Over'
You may have heard the argument that the stock market looks better than many
believe, based on the fact that several key sectors have not rolled over yet.
For example, while the slope of the S&P 500's 200-day moving average is
clearly negative, using the same gauge several market sectors look a bit better.
The charts below show the 200-day moving averages for healthcare (XLV), consumer
discretionary (XLY), technology (QQQ), and consumer staples (XLP).
Adding Price Into Equation
While the 200-days in isolation shown above look better than the S&P 500's
200-day, if we add price back into the mix, things start to look more concerning.
Consumer discretionary stocks have managed to reclaim their 200-day, which
is a positive development. However, the 200-day remains very close by and the
slope of the 200-day shows a very indecisive long-term trend (read vulnerable).
Tech stocks rallied back to their 200-day and thus far have failed to recapture
the "long-term trend" demarcation line. It is not uncommon for markets to rally
back to their 200-day during a correction or bear market, and then fail. Bulls
want QQQ to recapture and hold above the 200-day, which may happen, but it
has not yet.
Consumer staples have a similar "bounce" look. Price is below a downward-sloping
(bearish) 200-day moving average. Can it improve in the coming days? Sure it
can, but we need to see it.
The song remains the same with healthcare. A sharp plunge below the 200-day
followed by a bounce back to the 200-day. The chart below in its present form
is not an encouraging look for stock market bulls.
How Do The "Leaders" Look From A Weekly Perspective?
Regular followers know we use a set of weekly moving averages to monitor the
general state of trends. How do the S&P 500's strongest sectors look from
this perspective? The answer is not good.
While there is nothing magical about the 200-day or the weekly moving averages
used above, they can help us better understand an ETF's risk/reward profile
as described in this video
clip using the S&P 500 in a bearish period (2008) and a bullish period
(2009).
How Can We Use All This?
Under our approach, we need to see evidence of relevant improvement, which
differs from a normal bounce or countertrend within the context of an ongoing
downtrend. It is difficult to look at the weekly charts of the S&P 500's
strongest sectors and say "that looks like it is improving". Ugly markets and
ugly charts can begin to improve meaningfully at anytime. Therefore, we remain
open to all outcomes, including bullish outcomes. The markets will guide us
if we are willing to listen with a flexible, unbiased, and open mind.
