Stock Market Trend Indicators Remain Firmly Positive

As the equity markets reach for new highs, support for the uptrend is reinforced by a series of market indicators that remain firmly bullish. Baseline Analytics categorizes these indicators into three broad components:

1. Trend and Sentiment

2. Breadth and Internal Strength

3. Economic Indicators

Here is a visual display of how these indicators are performing today.

Trend and Sentiment. The steep uptrend in the S&P500 is steeper for my liking and would suggest a pause at some point relatively soon. Based on the strength of the uptrend, however, a pause is more likely to be seen as a trading range market or consolidation of recent gains, rather than an outright correction. Sharp trendlines like that shown on the S&P500 ultimately get broken. As for sentiment indicators, we look for extremes in VIX (such as a reading of 12 or below) and the Put/Call Ratio (such as a reading of 0.60 and below) to suggest a possible trend shift to the downside for equities. We do not see that in today’s indicators, as both remain neutral.

Breadth and Internal Strength. Indicators such as the NYSE Advance/Decline Ratio, New Highs vs. New Lows and the NYSE Summation Index all point solidly in the bullish direction with no divergences from equity market performance. The Summation Index is a breadth indicator based on Net Advances (advancing issues less declining issues). We look for the 400-level to mark the dividing line between an uptrend and a downtrend (the reading closed on Tuesday at 1218, nearly a new high).

Finally, Baseline Analytics reviews a series of economic and industry sector indicators. LQD vs. IEF is a ratio of corporate vs. US Government bonds. As the ratio climbs, the equity markets tend to move to the upside. Copper vs. US Bonds prices, as well as the S&P500 relative to bonds, reflect economic strength and risk appetite, as rising trends tend to coincide with higher equity prices. Copper has struggled for a while; despite the pickup in housing starts, mediocre GDP growth as well as a slowdown in China GDP and manufacturing growth rates may be factors weighing on this indicator. This represents a negative divergence from the equity markets. Other indicators of economic strength and reinforcement of the “risk on” trade include the relative outperformance of Small Caps vs. Large Caps (see our recent Blog on the topic), as well as outperformance of discretionary stocks vs. staples and defensive equities.

The strength of these market and economic indicators lend support to the bullish case. As most of these indicators push to new highs, caution is warranted, and a pause in the uptrend would be viewed as a welcome respite and an opportunity to join in on the rally and a favorable entry point.

- Baseline Analytics

Time For Growth To Outperform Value?

One of the indicators favored by Baseline Analytics is the Growth vs. Value Ratio. This is measured by taking the Russell 2000 Growth Index (RUO) divided by the Russell 2000 Value Index (RUJ). To measure trend, we plot this ratio against its 50-day exponential moving average. See the chart below:

As you will note, the Growth/Value Ratio, denoted by the solid blue line, tends to outperform during uptrends in the S&P500. Conversely, the Growth/Value Ratio underperforms during S&P500 downtrends, as value tends to be favored. Growth stocks tend to outperform during bullish enthusiasm, presiding during the "risk-on" trade.

In April, you can see that the ratio edged above its moving average (very slightly) and appears to be forming a respectable basing pattern. A climbing ratio will be supportive of a continued advance in the market indices. Keep a watch on this activity.

- Baseline Analytics