Trend-following indicators remain positive for equities

Despite minor setbacks for the S&P500 and for the Nasdaq last week, our trend-following systems and indicators continue to support long positions in equities.  

Several new bullish developments that emerged last week include the following:

• A surge in relative strength of Asian equity markets vs. the S&P500 (Hong Kong, Taiwan and China were particularly strong on the week). This reverses the trend that has been in place since October, when the S&P500 led Asian equities. See the chart below:

• Steepening of the yield curve. Not a good omen for inflationary expectations, but positive nonetheless at this juncture for equities.
• A rally in corporate bonds vs. treasuries as seen in our LQD (corporate bond ETF) /IEF (medium-term treasury bond ETF) ratio.
• Continued uptrend in small caps relative strength vs. large caps.
• Likewise, strength in growth vs. value is favorable for equities.
• The New York Stock Exchange McClellan Oscillator, an indicator of advances versus declines, strengthened last week and continues to flash a bullish signal for equities:

Bearish indicators include the following:

• Gains in US indices on weaker volume (note however that Friday's sell-off was on lighter volume).
• Continued weakness in financials vs. the S&P500.
• Gains in relative strength of Staples vs. Discretionary stocks.
• A decline in VIX as complacency picks up and Investor's Intelligence sports continues toppy bullish sentiment readings:

Our trend-following indicators continue to support equities as earnings season is upon us and seasonal risk (the "sell in May" mantra) begins to emerge.  With volatility (VIX) once again at low readings, a long equity portfolio with index put protection may be a sensible strategy as we head through April and into May.

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