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Why This Record-Setting Run May Not Be Over

3 sentiment indicators that bulls may find encouraging

by 6/7/2014 9:30:00 AM
Stocks quoted in this article:

Markets started off the first full week of June continuing their slow churn north; however, a round of fresh stimulus measures overseas on Thursday and an upbeat payrolls number on Friday sparked a fresh wave of buying power on the Street. By the time the dust settled, both the Dow Jones Industrial Average and broader S&P 500 Index were sitting in record-high territory for a second consecutive week. With this pair of indexes lingering just below a millennial mark and half-century mark, respectively, Todd Salamone explains what the significance of these technical levels could mean going forward.

  • The historical importance of the S&P 500 near half-century marks
  • 3 sentiment indicators that support the bullish case
  • Is "Anxiety over Complacency" an oxymoron? Rocky White surveys the current sentiment landscape to find out.

Finally, we close with a preview of the major economic and earnings events for the week ahead, plus our featured sector.

Notes from the Trading Desk: Revisiting the Importance of the SPX Trading Near Half-Century Marks
By Todd Salamone, Senior VP of Research

" ... The short-term overbought condition is happening in the context of the SPX approaching a half-century mark in the 1,750 zone, and such half-century levels have been important this year. For example, an advance to 1,550 in March began a month-long sideways grind and a move into the 1,650 zone in early May preceded volatile movement around 1,650 ahead of a decline back toward the 1,550 area by late June ..."

-Monday Morning Outlook, October 26, 2013

"The sentiment backdrop is growing more favorable for the bulls, but price action has to become more favorable, too, especially with the DJIA, SPX, and W5000 trading at historical resistance areas. A sustained move above these resistance areas, and the RUT moving above recent resistance from its 160-day moving average (currently situated at 1,135), would likely create more short covering or cause potential investors to move off the sidelines -- setting up the next leg of the rally and a thankful move from this dreadful trading range environment."

-Monday Morning Outlook, May 24, 2014
"The % $SPX components making 52-wk highs improving- bullish implications as it turns up from low levels

"$SPX approaching another half-century mark at 1,950 - such levels have been important (preceding trading ranges or short-term pullbacks)"

"$RUT back in green YTD with move above 1,163.64. Will get interesting from here as to whether this level acts as resistance or not"


-@ToddSalamone on Twitter, June 5 and 6, 2014

To the surprise of many market watchers (watchers used intentionally, as many appear to be on the sidelines), stocks continue to grind higher, after breaking out above resistance levels, per our discussion last week. With 1,900 on the S&P 500 Index (SPX - 1,949.44) in the rear-view mirror, and now targeting 1,980-2,000 (1,980 is the target for the inverse head-and-shoulders breakout pattern, and 2,000 is triple the 2009 low), traders should not lose sight of the historical significance of half-century marks on the SPX as the index approaches 1,950.

For example, as you can see in the chart below, the SPX either hesitated for a couple weeks to a couple months around such half-century marks (1,550 and 1,750), or became unstable after moving above a half-century level (1,650). The 1,650 level, in fact, was first tested in May 2013, but was not cleared for good until marking a bottom in early October, after a 4% pullback that lasted just under a month.

Daily 2013 Chart of SPX -- horizontal lines mark half-century marks
Daily Chart of SPX in 2013

Likewise, the 1,850 half-century mark proved to have importance in the first half of this year. In the beginning of 2014, the SPX consolidated in the first two weeks following a sharp rally in the last half of December, with 1,850 capping attempts to the upside. Finally, a two-week decline pushed the SPX back to the 1,750 half-century mark, where it found support preceding an impressive February rally back to 1,850 once again. From early March through early May, the SPX traded in a sideways pattern, with 1,850 generally marking support during the range days.

Daily Chart of SPX Since Mid-December 2013 -- 1,850 was important early in the year; will 1,950 now exert some influence?
Daily Chart of SPX Since December 2013

Similarly, the Russell 2000 Index (RUT - 1,165.21) may have to contend with resistance immediately overhead, as it trades in the vicinity of its year-to-date breakeven point of 1,163.64, after recently finding support in the 1,100 area as it experienced a 10% correction. Moreover, the Dow Jones Industrial Average (DJIA - 16,924.28) -- after finally making a sustained move above its year-to-date breakeven level that had acted as resistance through late May -- is now staring at another potential resistance, the 17,000 millennium level.

While speed bumps associated with a round number on the DJIA, a year-to-date breakeven mark on the RUT, and another SPX half-century mark quickly come into play, the good news is that the Wilshire 5000 Index (W5000 - 20,661.86) has apparently broken the chokehold of the 20,000 millennium level, and the S&P 400 MidCap Index (MID - 1,410.43) has finally moved above round-number resistance at 1,400, after first touching this level in early April.

S&P 400 Mid-Cap -- pushes above round-number 1,400
Daily chart of MID Since December 2013
Chart courtesy of StockCharts.com

Market breadth is improving, which was sighted as a concern among some technicians just a few weeks ago. In addition to small-cap and mid-cap stocks taking on a leadership role since mid-May, breadth is also improving among S&P 500 component names, with the percentage of stocks hitting 52-week highs rising. Per the chart below, note when the percentage of stocks hitting new 52-week highs turns higher from relatively low levels, it has had bullish implications. Of course, bulls would like to see the percentage of stocks in the SPX making new highs take out the former high, and this remains to be seen.

SPX Market Breadth Improving
Percentage of SPX Components Making New Highs

The sentiment backdrop suggests that there is a higher-than-normal probability that potential resistance levels discussed above are taken out in the near term, with a potential retest of these levels when an extreme optimism among traders is reached. At present, however, it appears the build-up in pessimism that occurred during the trading range is currently being unwound, and this is evident by short covering on components of the SPX and Nasdaq 100 Index (NDX - 3,794.57). Moreover, the unwind is evident in the roll-over from a near one-year high in the equity-only, buy (to open) put/call volume ratio, as displayed immediately below. As you can see, the 10-day average daily ratio has plenty of room to fall before it hits levels that have recently spelled trouble for the market.

As such, there is a possibility that the SPX breaks through its 1,950 half-century mark and moves on to the 1,980-2,000 resistance area, before retesting 1,950 once again.

Finally, while we are wary about getting caught up in the "low volatility" cautionary remarks that are making their way around, we should note that a potential floor in the CBOE Volatility Index (VIX - 10.73) is around 10.75, which is half the October 2013 and February 2014 peaks in the 21.50 area.

10-day, Equity-Only, Buy-to-Open Put/Call Volume Ratio since June 2013

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