An Over-Stretched Market With Notable Anchors

SPCFD:SPX   S&P 500 Index
AT40 = 41.2% of stocks are trading above their respective 40-day moving averages ( DMAs )
AT200 = 51.6% of stocks are trading above their respective 200DMAs
VIX = 12.1
Short-term Trading Call: neutral

The stock market is stretched yet again based on AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages ( DMAs ). AT40 closed the week at 41.2% after opening at 37% on Friday and closing at 38.7% on Wednesday. AT40 was last below 40% in late March and early April when the S&P 500 was in the process of forming a double bottom from the February swoon. AT200 (T2107), the percentage of stocks trading above their respective 200DMAs, also broke down to a 3-month low. So on a relative basis, the S&P 500 ( SPY ) is not likely to go much lower from here without a specific and very bearish catalyst. The S&P 500’s ability to levitate above its uptrending 20DMA adds to the impression that support will hold.

The NASDAQ and the Invesco QQQ Trust ( QQQ ) were last at all-time highs at the end of August. Both indices spent most of September pivoting around their uptrending 20DMAs. While the NASDAQ still looks locked into the pivoting, QQQ looks like it is breaking away.

While these indices are holding up well, other major indices have created anchors weighing on AT40.

The iShares Russell 2000 ETF ( IWM ) sold off enough in September to break down below 50DMA support. The Financial Select Sector SPDR ETF ( XLF ) broke out for a brief moment in mid-September only to reverse sharply. XLF ended September at a 5-week low and 50/200DMA breakdown.

The home builders represent another sector weighing on the market. On a percentage basis they are small, but the fresh technical breakdown last week spoke volumes.

The volatility index, the VIX , muddles the technical picture. It dropped on Friday to 12.1. I typically would look for a rebound in the VIX from these levels; it is hard for me to expect a fresh rally in the stock market from here. Of course, a rally is still possible and would likely push the VIX to or into extremely low territory below 11. From there, the historical record shows the market can continue a bull run for quite some time. August’s very brief stay below 11 was a notable exception.

Earnings season is coming up as the next major catalyst for the stock market. Until then, I cannot get too excited about the market’s upside prospects, but I also cannot get bearish with AT40 as low as it is.
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