An overbought condition has surfaced in the percentage of stocks above their 50-day moving averages. While prices have certainly extended their reach, this indicator in the past has remained overbought for a while before any meaningful market setback. Notice in the chart below the blue rectangle, whereby SPX stocks over their 50-day remained in the 85%-95% zone through March and April while SPX headed toward its late April high. This measure just recently hit the 85 level and could suggest continued strength in equities. Note that our indicator also remains above its EMA 20 (blue line), another positive.
Combing through our indicators, we are concerned about the underperformance of financials stocks, as noted in XLF vs. SPX. A less significant concern is the lack of a Dow Theory confirmation, as the Dow moved to a higher high without being joined by the Transports. M&A activity reported in this sector Monday morning may generate a confirming signal.
Some modest weakness is surfacing in the McClellan Oscillator, which remains below its EMA 20. Also note that the NYSI (New York Stock Exchange Summation Index) has flattened lately, but remains in bullish territory. Action in these indicators suggest some reservation on continued upside, perhaps a slowdown in uptrend momentum.
Overall, we cannot ignore the bullish activity yet the seasonal risk and continued mediocre economic news prepare us to protect our long profits should our indicators suggest a potential trend change.
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