“Traders try to beat the market but don’t understand that cumulatively they are the market.”
― Naved Abdali
Markets had some rough time this week. But if one would look at weekly price only, he would have no idea, that Monday was a panic day. Gap down and follow through but by the end of the day markets recovered a bit, next day it just continued higher. What can our models tell us about the health of the market?
Long term model
Model is still bullish, during the week it looked like it may start flipping but that did not happen. S$P500 – SPX, closed at 10 SMA weekly. No major sign of weakness for now.
You can find more about Longterm trading model here.
Midterm model
Advance/decline line (black line) held up well during the week, it looks like it wants to go higher, this would be bullish for stocks, since it would signify that investors are starting to increase exposure.
Indicator New highs minus new lows on NYSE is still dropping. This on it’s own is not a particular bullish signal as I would like to see it rising but there is no sign of bigger weakness in markets for now. See chart for how this indicator looked like during Covid bear market.
You can find more about Midterm trading model here.
Outperforming sectors
Sectors that outperformed this week or are outperforming S&P 500 in general are Semiconductors – SMH and XSD, Software – IGV, Cybersecurity – CIBR, India – INDA, Energy – XLE and IBD 50 ETF – FFTY. Large Caps MSFT, AAPL, GOOGL, AMZN are holding up well although they are under-performing general market.
Are investors in Risk ON or Risk OFF mode
Charts are telling me that investors are still in Risk ON mode. S&P 500 is outperforming: 20 year treasury bonds TLT , Gold GLD, Utilities XLU and Consumer staples XLP while Junk Bonds JNK are outperforming 7-10 year treasuries IEF. This tells me that investors are willing to invest in stocks rather than in defensive assets.
Additionally Semiconductors SMH, Software IGV and IBD Growth stocks FFTY continue to outperform S&P 500, which is more RISK ON environment.
Summary
My take on the markets is that we will continue higher. It has shown a lot of resilience during recent pullbacks. We are moving torward October which signifies that markets are entering into strong seasonal period. Markets are climbing a wall of worry.
May main two models remain bullish, no sell signals and no signs that one should raise cash just yet. This does not mean that we can not close lower tomorrow or finish the week lower. If that were to happen my models will warn you in time.
It has become obvious that one should pick sectors and stocks wisely. Stock trading is not easy. Be careful and good luck.
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