Ask anyone these days why stocks have bounced as far as they have, and you're likely to get a blank stare. Earnings season proved to be dismal yet again. The economy remains a mixed picture, improving slowly but not nearly as quickly as most would prefer. Uncertainty regarding Fed policy seems to be reaching record peaks as the U.S. fights the global trend of monetary accommodation.
Meanwhile, numerous Fed "talking heads" who opine with differing opinions seem to be wreaking havoc with market volatility, as no trend lasts more than a few weeks before violently reversing course. To top that off, geopolitical angst and political disagreement have combined to produce a record amount of populist rhetoric on both sides of the political spectrum, which doesn't seem to be ending anytime soon.
Finally, when contemplating the reasons why the market "should" have sold off in recent days, but hasn't, including the horrific Belgium attack or recent overbought conditions, it's easy to see why 2016 is turning out to be one of the toughest markets in years.
Stocks have climbed this wall of worry with understandable apprehension from most of the investing public. Most casually toss out phrases like "short covering" or "defensive rally" like they're proud to know the real story, yet only serving to hide the fact that most have completely missed out on this 13% surge from the lows.
Again, overall, three technical factors serve as important underpinnings in this move, which are essential to master for those that hope to conquer the "swings" in investing this era of "new normal" volatility.
First, breadth has surged to record highs of late. Technical gauges that measure advance/decline plurality such as the McClellan Oscillator moved to the highest levels since early 2009 over the last five weeks. Additionally, the percentage of stocks trading above their 50- and 200-day moving averages have bounced substantially with the percentage >50-day moving average nearly hitting 90% last week, the highest level in over five years. The actual NYSE advance/decline also managed to rise back over last November highs, despite that prices remain nearly 5% below these levels. Overall, these breadth gauges combine to produce a fairly robust rally of late, which despite defying most fundamental reason, certainly has solid technical grounding.
Second, in the last month, the market has slowly begun to shift from its defensive positioning to more broad-based sector strength in important groups such as industrials, technology, and financials, which, combined, make up more than 50% of the S&P 500.Health care has also begun to show some early signs of rebounding, and looks technically positive, and likely to follow-through.
Third, sentiment continues to look fairly subdued when compared with the amount that prices have gained in recent weeks. When looking at the American Association of Individual investors (AAII), Investor Intelligence, Daily Sentiment index (DSI), or the equity put/call ratio, none of these have produced signals that would indicate much optimism in stocks. Potentially, lackluster global growth and a poor earnings picture have combined to dampen investors' enthusiasm, but equity outflows over the last 13 of 15 weeks have painted a picture of a market which is much more skittish than might be expected when prices are less than 5% from all-time highs.
Two important charts are worth highlighting. The first is the McClellan Summation index, a summation of all the daily values of the McClellan Oscillator, to provide an intermediate-term gauge for the markets direction and power. This chart, above, shows the Summation index having risen to the highest level since early 2014, surpassing highs made last November, as well as former all-time high peaks in May. Based on this alone, one can certainly see why stocks have proven to be far more resilient than many would have thought.
Next, the percentage of stocks trading above their 50-, 150-, and 200-day moving averages have also spiked, with the percentage of NYSE issues trading above their 150- and 200-day moving averages having moved to the highest levels since last spring (see chart above). In addition, the percentage trading above their 50-day moving average is now at the highest since early 2009, having recently hit highs right near 90%.This is a very extreme level in the near term, yet also an indication of a rally that is much stronger than most people are giving it credit for.
Overall, the combination of these breadth indicators suggest that markets will likely have a date in the not-so-distant future with all-time highs.