Stocks moved smartly to new highs in the major averages this past week. Sector rotation was particularly noteworthy, with former leaders utilities and consumer staples--defensive and yield plays--falling behind and more growth-oriented sectors--consumer discretionary and raw materials--showing particular strength. This reflects strength in U.S. economic data and an increased pricing of odds that the Fed will begin to normalize interest rates later this year.
The top chart tracks the number of stocks across all exchanges making fresh three-month new highs vs. new lows. (Raw data from the Barchart site). Note that new highs have been growing in recent sessions, but remain below peak levels seen in 2014. This reflects the fact that many sectors, such as financials, energy, consumer staples, and healthcare, have not registered recent new highs. Still, I note that relatively few shares are registering fresh new lows, an indication that buying has been broad-based. Indeed, the bottom chart tracks the Cumulative NYSE TICK--the cumulative upticks vs. downticks for all NYSE stocks--and shows consistent buying interest from institutional players. (Raw data from e-Signal).
The second chart from the top is my measure of intermediate term market strength. It is a 10-day moving average of SPX stocks making 5, 20, and 100-day highs vs. lows. (Raw data from Index Indicators). It has risen sharply in recent sessions and is near a momentum peak. Note that it is not at all unusual for this strength measure to top out ahead of price during intermediate-term market cycles, which means that we could see further upside drift even if breadth moderates from here.
The second chart from the bottom shows the number of NYSE stocks closing above their upper Bollinger Bands vs. those closing below their lower Bands. (Raw data from Stock Charts). It is very common for this measure to peak ahead of price during intermediate-term market cycles and that's what has happened so far. Note, however, that the Bollinger Balance--the number of stocks closing above vs. below their Bands--has remained consistently positive in recent sessions, reflecting the buying pressure noted above.
So where does that leave us? Here are a few observations:
* We made a momentum low in mid-January, with the lows in very early February drying up. From that point, we have embarked on a new intermediate-term upward cycle, which is approaching a momentum peak;
* Buying pressure has been significant during this most recent upward cycle and should continue to propel prices higher, even after we have made a momentum (breadth) peak for this cycle. We need to see selling pressure from institutions begin to exceed buying pressure before the current cycle is imperiled;
* Despite fresh price highs, many sectors are not making new highs thus far and stocks making new highs are below 2014 levels. I believe the current upswing is part of a broad topping formation in stocks and not a fresh bull market leg; a significant expansion of new highs beyond 2014 levels would contradict that view;
* In my current base case scenario, we continue to drift higher on upward buying momentum, but ultimately will top out and return to the late 2014 trading range as part of the market's broader topping.
This is a general roadmap; a broad hypothesis rather than a hard and fast conclusion. As always, I will be tracking the market measure and updating that roadmap.
Further Reading: Views of Market Breadth