Sentiment Shifts, Blue Sky Ahead?

After a nine-day decline of 5.86% in October it was the last five-day rally of 5.85% that has finally given investors some hope. That was evident on Thursday as the weekly survey by the American Association of Individual Investors (AAII) revealed that those expecting the S&P 500 to move higher in the next six months jumped to 42.6% up from 24.3% the prior week.

According to AAII, it was the largest increase since July 10, 2010. Still, it was below the July 19th bullish % of 51.4%. It is above the historical average of 37.5% and you may recall that another similar surge in February 2023 was credited for the market’s following correction. Last week’s bearish % dropped 23.1% from 50.3% to 27.2%. It is also now below the historical average of 31%.

In last week’s analysis, I determined that the odds of a pullback were quite high in light of the prior week’s action and several extremely overbought readings. Instead, stocks powered to the upside with only a brief pullback on Thursday before further gains on Friday.

Overall it was a mixed bag for the week as the growth-heavy Nasdaq 100 led the averages by gaining 2.9% followed by an increase of 1.3% in the S&P 500. The only other winner was the 0.7% gain by the Dow Jones Industrial Average.

The iShares Russell 2000 was again the weakest as it was down 3.1% for the week and is now 1.9% lower year-to-date (YTD) The SPDR Gold Shares were not far behind losing 2.9% while the Dow Jones Utility Average declined 2.6% for the week. It is now down 13.4% YTD.

The market internals were decidedly negative on the NYSE with 967 issues advancing and 2022 declining. On the Nasdaq Composite, the A/D ratio was 2-2 negative. So what turned many analysts and traders more optimistic?

For some, I think it was the possibly unfounded belief that the Fed was done raising rates. The Fed, including Fed Chair Powell, pushed back on this conclusion last week. For others, it was the strong price action of the Invesco QQQ
Trust (QQQ) and to a lesser extent the S&P 500 as both overcame the highs from October.

The 10.5% QQQ gain from the late October low of $$342.35 has been impressive as it was greater than the yearly performance in both 2015 and 2016. The close at $378.39 was above the October high of $373.74 and broke the downtrend from the July high at $388.70, line a. This is the next key level of resistance. The 20-week EMA has turned up and stands at $360.57.

The Nasdaq 100 Advance/Decline line moved further above its WMA last week and closed above the downtrend, line b. This is typically a sign that the correction is over. The relative performance (RS) has favored QQQ since the start of the year and it overcame resistance, line c, last week to make another new high. QQQ is still a market leader.

The Spyder Trust (SPY

closed at $440.61 and above the October highs but is still below its downtrend from the summer highs. The blue solid line is for the closing price of the NYSE Composite which is a much broader market average than the S&P 500.

The NYSE failed to make a new high with the S&P 500 at the end of 2021 (see red arrow) and has been lagging since then. That is especially true since the July high as it broke below the support at line a, and dropped well below its June lows while the S&P 500 did not.

The weekly S&P 500 Advance/Decline line is also weaker than the Nasdaq 100 as it only closed 2 points above its EMA. The peak in July projected a new high for the S&P 500 but it subsequently violated the support at line b. The downtrend from the prior two peaks, line 2, has not been overcome.

The lagging action of the NYSE Composite could be a result of the bond funds it contains but then one would expect the NYSE Stocks Only A/D line to be stronger but that has not been the case. The NYSE All A/D line is also negative but did rebound a bit more from the October lows.

Both of the weekly NYSE A/D lines are in downtrends, lower lows, and lower highs. Strong numbers this week could move them above their last high but they need lots of work to catch up with the QQQ A/D line. The action of the NYSE A/D lines is in conflict with the recent Zweig Breath Thrust buy signal.

It was another good week for growth stocks over value. The growth iShares Russell 1000 (IWF
) was up 3% while the value iShares Russell 1000 (IWD
) was down 1%. This was consistent with the move in the IWF/IWD ratio above the resistance at line a, on October 2nd. The ratio looks very strong which favors growth. The daily MACD analysis has confirmed the action in the ratio as it turned positive last week.

Having been bullish for most of the year, the market rally from the October lows and the disparities in the market internals are turning me more cautious now. This is currently magnified as some growth ETFs and stocks are currently quite extended on the upside. The global uncertainties and the US funding deadline also increase the potential risk as we head into the end of the month.

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