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Key Points

  • Pharmaceuticals are Showing Signs of Relative Improvement
  • Breadth Metrics Continue to Diverge with Record Equity Levels
  • Short-Term Measures are Slightly Better on the Week
  • Small Caps Remain the Weakest
  • New Chart this Week: NYSE 52-Week and Six-Month Highs

Chart in Focus:

We have written a lot about improvements in the Health Care sector and today note that another industry within this group may be transitioning to a leadership position. The absolute trend for the S&P 500 Pharmaceuticals Index has been and remains strong. The index traded to a new high yesterday and is well above the rising 50-day moving average. However, it is the relative performance that has our attention today. The ratio is moving toward the top of the consolidation zone that has been in place since February and is above the 50-day moving average. We are on watch for a relative breakout.

NYSE Breadth

The Advance/Decline for the NYSE, though off the lows seen last week, remains below the 50-day moving average. This measure of breadth continues to diverge from the S&P 500, failing to confirm the record highs that were reached this week. The question on the mind of many investors is, “will this divergence be alleviated over time, or will the S&P 500 finally succumb to the bad breadth by breaking lower”? We continue to watch the 50-day moving average which has been a solid guide for the trend in the index.

The exact same scenario is playing out when we look at the NYSE’s Advancing – Declining Volume Line. The indicator remains below its 50-day moving average while the S&P 500 holds above. Here the case can be made that the indicator is slightly weaker, as the moving average is beginning to turn lower.

The 5-day moving averages of issues on the NYSE making new 52-week and six-month lows remain above 1%, and in line with the levels that were highlighted last week in this note. Ideally, these metrics would be near the 0% level. A persistent build in these new lows would certainly be a reason to become more cautious on the equity prices.

Flipping the view of the charts above, we can look at the 5-day moving average of NYSE issues making new 52-week and six-month highs. Both are currently around the 3.5% level and trending to the downside. As with many of the other breadth metrics, these are diverging with the price of the S&P 500.

The percentage of issues on the NYSE that are trading above their respective 200-day moving averages has improved slightly week over week but remains below broken support and the downtrend line. Holding the 60% threshold is a positive but this metric continues to diverge with the index.

Despite a short-term bounce attempt, the percentage of NYSE issues trading above their own 50-day moving averages remains weak. The current reading of 40% is in line with the last week’s measure but the series of lower highs and lower lows remains in place.

The percentage of NYSE issues trading above their respective 20-day moving averages has seen the most improvement over the course of the past week, rising from ~36% to ~40%. That is not to say that the market is out of the woods from a breadth perspective. However, long-term improvements usually begin in the short-term, and this is a step in the right direction.

As was the case last week, the breadth metrics for the S&P 500 are stronger than what we see for the NYSE. In particular, the Advance/Decline line is testing record highs as the index does the same. The percentage of stocks above their 200-day moving averages offers something for the bulls and the bears. The bulls will point out that a healthy 88% of stocks are above this measure of long-term trend. The bears will correctly highlight the divergence that has been in place since April. The percentage of stocks above their 50 and 20-day moving averages both improved on the week but remain below the 60% level.

Small Cap Breadth

Small Cap breadth continues to be the worst of the bunch. The S&P 600 Advance/Decline Line remains below the 50-day moving average despite showing a slight improvement on the week. The percentage of stocks above their 200 and 50-day moving averages both weakened slightly on a week/week basis. The short-term trend metric saw the most improvement on the week, but the percentage of stocks above their 20-day moving averages cannot be described as healthy at current levels.

Take-Aways

Yes, there are some subtle signs of improvement in a few of the short-term breadth metrics but overall, the level of participation in the market’s uptrend is lacking. Small Caps remain the weakest group while the S&P 500 is the strongest. Away from breadth, the S&P 500 Pharmaceuticals Index is the latest area of the Health Care sector to show signs of improvement.

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.