Weekly Technical Market Outlook 2/24/2014

Sorry for getting this post up a little later than normal. My birthday was on Sunday so I was out with friends most of the weekend, leaving me little time to write. Nonetheless, while shorter than normal I’m still getting my charts updated and will be back will a ‘fuller’ version of the Weekly Technical Market Outlook next week.

Equity Trend

While the S&P 500 ($SPX) closed just slightly in the red during the shortened trading week, we are still in an up trend for the equities market. All eyes are on 1850 as bulls will be biting at the bit to set a new high.

SPX trend

Equity Breadth

Last week produced some more strong trading sessions in respect to market breadth, with the Advance-Decline Line setting another new high. While the underlying indices are still battling with resistance we are seeing a larger amount of NYSE stocks staying in the green, which is what’s pushing this measure of breadth higher. The Percentage of Stocks Above Their 200-day Moving Average indicator is still in its range. We were unable to see a break of 72.5%, which is what’s needed to get us above the previous three highs since last July.

breadthEquity Momentum

We are still seeing some signs of struggle in our momentum indicators. As previously mentioned, the S&P 500 ($SPX) has yet to set a new high, but at least it’s gotten close. We can’t say the same for the Relative Strength Index which hasn’t even broken 65. As I wrote in last week’s Technical Market Outlook, the market was able to work through these divergence throughout 2013 trading as price marched higher, but the sign we need for this pattern to continue in 2014 needs to come from market breadth. If we can get more stocks confirming the up trend then it makes it easier to ‘forgive’ momentum from being weak. However, if both momentum AND breadth begin to weaken, then that’s when we’ll start raising a red flag.


Business Cycle

At the end of last year I wrote a post called Where Are We In the Business Cycle? As the asset classes have improved, I wanted to show an updated chart from that post. In the post from December I showed how bonds ($USB), stocks ($SPX), and commodities ($GSG), performed going into the previous two market peaks. At the time we were seeing commodities flirting with its bull market trend line, as well as bonds experiencing a bout of weakness. With the resurgence of buyers stepping into the bond pits, and commodities showing signs of a rebound, all three asset classes continue to hold their up trends, which is positive for the current business cycle.

biz cycle

60-Minute S&P 500 

I’m glad to see futures positive this morning, because the short-term chart for equities doesn’t look great. As I’ve mentioned, we struggled with setting a new high last week putting in a potential short-term double top at 1846 with the Relative Strength Index and the MACD putting in bearish negative divergences. We did see support come into play with the 50-1hr Moving Average, which held off sellers last week. If we see continued selling I’ll be watching to see if this moving average can hold once again or if we begin to head lower and test the previous low of 1810.

SPX 60min

Last Week’s Sector Performance

Last week we saw energy ($XLE) continue to show strength as it came in on top for the second week in a row. Health care ($XLV) and utilities ($XLU) also showed strength while the overall equity market closed out the week slightly in the red. Once again, the financials sector ($XLF) was the worst performer during trading last week.

week sector perfYTD Sector Performance

So far 2014 trading as shown a strong bias to the defensive sectors, with utilities ($XLU) and health care ($XLV) continuing to be the stars YTD. Interestingly, the consumer staples sector ($XLP) is acting as the ugly step child of the defensive portion of the market, straying away from its two counterparts as it has now beaten out energy as the worst performing sector year-to-date.

YTD sector perf

Major Events This Week

While not an often discussed economic data set, this week we get the Chicago Fed National Activity Index, which in my opinion gives a great read to where we are with respect to economic growth. Q4 2013 GDP data comes out on Friday which will garner much attention as the week progresses.

Monday: Chicago Fed National Activity Index
Tuesday: S&P Case-Shiller Home Price Index
Wednesday: New Home Sales
Thursday: Jobless Claims and Durable Goods Orders
Friday: GDP and Pending Home Sales

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Where Are We In the Business Cycle?

Today I want to look at the three major asset classes, bonds ($USB), equities ($SPX), and commodities ($GSG) and how they can help us better understand where we are in the business cycle. John Murphy in his book Trading Intermarket Analysis does a great job at highlighting the relationship between these three asset classes and how they function during the business cycle.

Murphy references the following chart of the business cycle and shows that depending on what stage of the cycle we are in, the assets perform differently. Based on this, and I’ll show the chart further down in the post, it appears we may be entering stage four. I’ll explain why later. Here’s how Murphy describes the cycle, ” The business cycle is shown as a sine wave. The first three stages are part of an economic contraction (weakening, bottoming, strengthening). Stage 3 shows the economy in a contraction phase, but strengthening after a bottom. As the sine wave crosses the center line, the economy moves from contraction to the three phases of economic expansion (strengthening, topping and weakening). ”

im-10-cycleBefore we look at the current market, lets take a look at previous market peaks (no I’m not calling for a market top, keep reading). As Murphy describes, during a normal cycle we will see bond prices top out first and begin a down trend, followed by stocks with commodities being the last to weaken. This is how things played in 2000. As the chart below shows, the top panel is the 30-year Treasury Bond ($USB) which broke its up trend in late 1998 with equities ($SPX) topping out in 2000, followed by commodities ($GSG) in the bottom in early 2001.

2000 top cycle

Next up we have the market peak in 2007.  Price action played out slightly differently leading up the economic cycle peak. While bond prices put in their low in 2004 we began seeing lower highs and higher llows from 2005 through 2007. Equities followed by peaking in 2007 and commodities ultimately toppled over in 2008.

2007 top cycle

So how do things look now? Not too bad. All three asset classes are still in their up trends; however, bonds are well off their highs. The 30-year Treasury bond appears to have potentially topped out last year as it starts to threaten its trend line off the 2007 and 2011 lows. Commodities, while not a great performer during the current bull market, are still in an up trend. And of course equities continue to make higher highs and higher lows with plenty of space between price and its trend line.

This is why I think we may be getting close to stage four in the business cycle. It’s possible we see bonds break their up trend in 2014 and light the match for economic contraction and ultimately a peak in equity prices. But it’s important to remember that the time between the peak in bonds and the top in equities can be years. Look back at the first chart, Treasury’s hit their high nearly two years before equities topped out.

Current cycle

While each market period is unique and involves different forces and economic environments, I think it’s important to watch these three assets and how they are related to one another. Based on the above chart it seems we are still in expansion phase of the economy and the market. I’ll be watching how things progress as we kick off 2014 and how these three assets perform.

Source: Intermarket Analysis (stockcharts.com)

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Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.