Week In Review: Equity Strength, Breadth Participation, Sector Performance, Crypto Stocks, & Earnings Expectations

The S&P 500 finished last week up 1.57%, the Dow and the Russell 200 both  rose 2% and International markets (EAFA) finished the week up by 1.59%. This has been a very strong start to the a new year, the strength from 2017 has clearly flowed into ’18 and with that, here are the charts I find worthwhile to start the week…

Distance From Major Moving Averages
First let’s take a look at just how strong and fast this move in stocks has been. We are currently in thin air in respect to the distance for the S&P 500 from its 50-day (4.8% above), 200-day (10.88% above), and 1-year Moving Averages (12.53% above). In the last 10 years we’ve only seen the index this far above all three at the same time three times: April 2010, February 2011, and May 2013. We saw a pullback in each of those occurrences but to a varying degree as 2013 was much less of a drawdown compared to ’10 and ’11. Last year we saw the market set quite a few records and that theme doesn’t appear to be over as we make our way into 2018.

Equity Trend Strength
Another way we can measure the magnitude and strength of the current trend is by using the Average Directional Index (ADX) indicator, which measures the strength of a trend, no matter its direction. Below is a weekly chart of the S&P 500 going back to 1990. The sixth month ADX has only been as high as it is now three times: the start of the tech boom, the crash after the tech boom,and the 2008 financial crisis. So while a sample size of three is hardly anything to put weight on, before we call this current rise ‘too much too fast’, all three of the prior price movements that were this strong did not stall out once their ADX levels reached historic highs like they did. So if you’re looking to pain the current market as bearish, you can’t use its current trajectory as a bullet in your arsenal, not based on history at least.

Confirmation in Equity Participation
For a little while we were just seeing strength coming from the Advance-Declining Line of the large- and mid-cap indices, I shared this chart in my Year In Review to highlight the lack of confirmation from small-caps. However, the recent move in 2018 has helped correct that divergence and we now have all three asset sizes making new highs in their Adv-Dec Lines – a positive sign for the current up trend in equities.

New 52-week High Reaches a New Recent High
Rachel Shasha (h/t Callum Thomas) recently pointed out on Twitter the number of stocks on the S&P 500 that have hit a new 52-week high is at the highest level since 2014. This can be viewed one of two days… 1. Trends often change direction following divergences in this type of breadth data. meaning, as the index is making higher highs less of its component stocks are doing the same which eventually pulls the index itself lower. So this new high would be viewed as bullish since a divergence has not developed. 2. Corrections and small pullbacks can occur when breadth sees a burst higher like this. In fact, that’s what happened in April 2014 when we last saw this many new 52-week highs, the S&P had a slight pullback of about 4% before continuing higher, trend intact. Which would cause you to pause with this burst higher, expecting a pullback like we saw in ’14. It’s up to you which line of reasoning you take with this data.

Sector Performance
While we are just two weeks into the new year, below is a chart of the performance for the S&P sectors, all but consumer staples and utilities are currently outperforming the S&P 500 after the first 10 days of trading.

Sector Relative Rotation Graph
As we could see in the chart above, energy, consumer disc., and industrials are the strongest sectors YTD. They also are the only three sectors to in the ‘leading’ category of the RRG chart. While staples are the second worst performer for 2018 (again, its only been 10 days), they are making a nice move through the ‘improving’ quadrant and may be a sector that sees better performance soon. Meanwhile, the other two defensive sectors, utilities and health care, remain in the ‘lagging’ category; which is something equity bulls may like to see – viewing it as a sign that traders are showing stronger preference for the higher beta sectors.

Broad Sector Performance
If we broaden the scope of sectors we can see that autos, energy, aerospace and retail are showing good strength to start the year.

Retail
Last year it seemed the focused was squarely on tech in the retail space and the cannibalization of traditional brick and mortar retailers. However, in the first two weeks of trading its been the regional department stores that have been the strongest industry inside the retail space. Convenience stores (while this list just includes 3 stocks) are up 11% YTD after not evening finished 2017 in the black.

 

Crypto Stock Hysteria
One popular theme for stocks is to enter the blockchain/crypto space, often changing their company name to make it painfully obvious that retail investors should gobble up their shares, sending the price violently higher. Chris Mayer shared this table of blockchain-related stocks and their resulting price action over the last two months. As you can see, the average move higher has been 165% (median 126%)….in just two months! Do note the number of these stocks that started their pump advance under $5/share.

Earning Seasons Expectations
Earnings season will soon be upon us and based on estimates from Fact Set, the bar has been set quite high. The focus on many of the earnings calls will surely be on the recent tax bill and the implications it’ll have on individual businesses. But if all goes to plan then we should see the third year of 10+% earnings growth, a sign Wall St. will surely be pleased with.

Future Cap-Ex Spending
Along with the discussion of the tax bill implications, earnings calls will likely include a great deal of capital expenditure. At least that’s what’s being expected of them. In fact, future cap ex spending expectations are at one of the highest levels in 30 years via this chart from the WSJ.

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.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.

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