Are stocks in a bull market phase at the moment?

Well, that certainly depends on where you’re looking. If you’re analyzing the Nasdaq 100 index, or semiconductors, or AAPL, or NFLX, or a handful of other mega-cap growth names, then that is basically an undeniable truth at this point. If you’re looking at energy stocks, or the financial sector, or the equal-weighted S&P 500, or to be completely honest most US stocks at this point, then that answer is a little tougher to justify.

So how much of a problem is it that this “narrow leadership” issue we’ve discussed frequently on The Final Bar continues to plague the equity markets as we near the end of May 2023? That depends on what you own during this narrowly-led bull market phase!

If you’re in the Nasdaq 100 (top panel, black) names like MSFT and AAPL, you’re seeing another strong up week. You’ve experienced a new high every month so far in 2023, including May. The trend is your friend, and that trend is clearly bullish!

If you own the S&P 500 index (middle panel, blue), you’re probably feeling cautiously confident at this point, with another test of the February highs working this last week. Although previous attempts to push above S&P 4200 have failed, the rally through the course of this week most likely lets you head into the holiday weekend with renewed optimism.

What about if you own the “average” S&P 500 stock, as represented by RSP, the equal-weighted S&P 500 ETF (bottom panel, red)? Now you’re thinking less about the February highs and more about the March lows, which are still very much in play.

And it’s not just the S&P 500 index having this “lack of participation” issue. Here are the cumulative advance-decline lines for the NYSE, large caps, mid caps, and small caps.

Note how, while the S&P 500 has been trending higher over the last six weeks, literally all four of those advance-decline lines are sloping lower. If the A-D lines are the real representation of the market trend, an argument that we find has great value these days, then this may be in fact a clear bear market phase! Yet the averages keep pushing onward and ever upward.

To add fuel to the bullish fire, we have the New Dow Theory chart very close to signaling a “bull confirmation” signal. We would need to see an upside follow-through next week to complete the pattern, but the setup so far seems constructive.

Charts like Netflix (NFLX) keep pushing above key resistance levels, indicating that additional buyers are coming in and providing further upside momentum. And with Consumer Staples stocks pulling back from their own resistance levels, the offense-defense ratio appears to be rotating clearly to the offensive side.

My biggest concern for this market? Limited upside from current levels. There are indeed two ways that this market resolves from here.

The first option is that breadth conditions improve, with beaten-down names that have yet to be participating in the upswing start regaining their ground. There are more 52-week highs to be had and charts like the McClellan Oscillator get out of the “bearish” region by breaking back above the zero level.

The second option is that the influx of demand for growth stocks pushes prices to unsustainable levels, as the FOMO-led AI craze evaporates, the music stops, and the lack of breadth support finally becomes the death knell for the great bull market of early 2023.

What’s the good news?

If the bullish option plays out, there will be plenty of buying opportunities. While it feels like you may have missed out on the biggest bull run in stock market history, things may just be getting started. Watch for breakouts, set price alert, run your scans, and you will find charts that are at actionable entry points.

If the bearish option plays out, then the charts will tell you when the uptrend in growth stocks has run its course. Watch indicators like RSI for bearish divergences, use something like MACD or PPO to confirm a downside rotation, and stick with uptrends until the chart tells you the uptrend is done.

I asked our three panelists on The Pitch this week (thanks again to Dave Landry, Mark Newton, and Joe Rabil!) how they manage to survive challenging periods like this. I thought Mark’s response was as good as I’ve heard.

“Well, I try to surround myself with charts rather than news.”

Well said, Mark.

Our latest YouTube video digs into the chart of Netflix, tracking the latest breakout and using RSI and Fibonacci Retracements to identify potential resistance levels. Check it out!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

In this episode of StockCharts TV‘s The MEM Edge, Mary Ellen reviews the broader market’s move following the strong earnings report from Nvidia (NVDA) Wednesday afternoon. She also discusses which areas were most impacted and how you can capitalize on the renewed interest in AI. The rally in Banks is also highlighted.

This video was originally broadcast on May 26, 2023. Click on the above image to watch on our dedicated MEM Edge page on StockCharts TV, or click this link to watch on YouTube. You can also watch on our on-demand website, StockChartsTV.com, using this link.

New episodes of The MEM Edge air Fridays at 5:30pm PT on StockCharts TV. You can view all previously recorded episodes at this link. You can also receive a 4-week free trial of her MEM Edge Report by clicking the image below.

On this week’s edition of StockCharts TV‘s StockCharts in Focus, Grayson tours you through the chart annotation tools in both SharpCharts and ACP, our Advanced Charting Platform. Along the way, you’ll get some helpful tips and tricks that will enhance your drawings and streamline your annotating experience. With shortcuts and hotkeys, you’ll be drawing trendlines, support and resistance lines, Fibonacci levels and more faster than ever before.

This video was originally broadcast on May 26, 2023. Click on the above image to watch on our dedicated StockCharts in Focus page on StockCharts TV, or click this link to watch on YouTube. You can also watch on our on-demand website, StockChartsTV.com, using this link.

New episodes of StockCharts in Focus air Fridays at 3pm ET on StockCharts TV. You can view all previously recorded episodes at this link.

I like just about all types of breadth indicators, but I have learned that each type of breadth data requires its own proper manner of interpretation. The whole point of looking at breadth data is to get a different answer about market behavior than what prices are saying, and hopefully that different answer is a useful one.

For this reason, I do not pay much attention to the difference between New Highs (NH) and New Lows (NL). Each of those items can be interesting on its own, if interpreted in the right way, but putting them together is not very useful.

This week’s chart shows a cumulative daily NH-NL Line, which is constructed like a daily Advance-Decline (A-D) Line. We take the number of NH and subtract the NL to get the difference, then add that to the prior day’s value for this NH-NL Line. It is not very useful because, while it matches the price trend, this NH-NL Line lags prices at the turns. Getting a delayed message about a price trend change is not very helpful. It also does not show us useful divergences like the A-D Line does, so we really cannot get any functional information from looking at NH and NL data that way.

One way to combine the NH and NL data that is somewhat useful was developed many years ago by a technical analyst named Mike Moody. It involves these same raw data items, but the magic seems to come from the additional math thrown into it.

Moody’s innovation was to take NH and divide it by the sum of NH+NL, then calculate a 10-day simple moving average of that ratio. Because of the shorter lookback period, it is a much more lively indicator, one which tracks the shorter-term price moves pretty well. And it does sometimes show us useful divergences versus prices. Like any indication of trend, it is subject to noise, whipsaws, and delays, and, when it does display a divergence, one does not know at what moment this apparent divergence might start to matter.

I have found it useful to look at the numbers of NH and NL separately, rather than together. And of these, the numbers of NH tend to give the more useful indications.

The daily number of NH is quite a bit noisier than the 10-day smoothed version that Moody developed, which makes sense. It also shows us more frequent useful divergences, but, once again, there is the problem of not being able to know when an apparent divergence might start to matter. The NL number can get a lot more exciting, but only after a selloff that is severe enough and long enough to produce a rising number of stocks making new 52-week lows.

The problem with this is that, by the time you see a big number for NL, you probably already know from other signs that an ugly price move has been happening. You probably don’t need confirmation from the number of NL in order to know that. But one cool feature is that, in a sharp selloff, the day of the maximum number of NL is almost never the same as the final price low. So, if you see NL making a higher value, you can have some assurance (but not certainty) that the final low is likely not here yet.

I should note a couple of things about these data. The calculations of NH and NL, for years, have employed a 52-week lookback period. It has not always been that way. Before 1980, all of the tabulations of stocks making new 52-week highs or lows were done on paper ledgers, and the record-keepers would have a separate ledger for each stock and for each calendar year. So, on January 2, a new ledger would be started for each stock, tracking its price travels in that calendar year. Because using a new ledger would mean that on the first day of the year, every stock would either be making a new high or a new low for the year, that information would not be useful at all. So the record-keepers would carry over the prior year’s records for a few weeks into the new year, before, sometime around April, they would switch to the new year’s ledgers.

Because of this recording methodology, the NH and NL data which exist before 1980 could employ anywhere from a 4 to 16 month lookback period, making them questionable for their utility. Starting in 1980, the data honchos finally possessed enough computing power to switch over to a more uniform lookback period of a year, and that is the standard that continues in these statistics to this day. It is also worth noting that the tabulation of whether an individual stock has made a new high or a new low is based on intraday trading. So a stock might not have a 52-week closing high, but it could be counted in the NH column of data if it made a new high intraday.

Looking at daily totals of both NH and NL is also sometimes useful, as the late Jim Miekka showed us with his Hindenburg Omen. That signal was a refinement of Gerald Appel’s old “Split Market Sell Signal”, which would be triggered any day that saw both NH and NL for the NYSE exceed 45 on the same day. This was similar to Norman Fosbacks High Low Logic Index, which also looked at big days for both NH and NL. The idea is that seeing both NH and NL get up to high enough values was a sign of illiquidity, and an uptrend coming apart. Miekka adjusted for the changing numbers of issues over time, and added a few additional rules (including use of the McClellan Oscillator) to get better signals.

Coming back to the current day readings, the declining numbers of NYSE NH that are being recorded lately even as the S&P 500 was making higher price highs was a warning of trouble, and is a sign of a loss of broad participation in the rally. That warning does not tell us very much about the potential severity of any decline, but it does tell us that there is a problem.

On this week’s edition of Moxie Indicator Minutes, TG explains how today was all about NVDA, semis, and sympathy moves. If we look under the hood, we continue to see that some names are doing great, while many others remain weak. Let’s look at those names, along with some foreign ETFs, so see how the Moxie Indicator is showing their weakness.

This video was originally broadcast on May 26, 2023. Click this link to watch on YouTube. You can also view new episodes – and be notified as soon as they’re published – using the StockCharts on demand website, StockChartsTV.com, or its corresponding apps on Roku, Fire TV, iOS, Chromecast, Android, and more!

New episodes of Moxie Indicator Minutes air Fridays at 1:15pm ET on StockCharts TV. Archived episodes of the show are available at this link.

When the stocks of large-cap companies, such as Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), and Nvidia (NVDA), keep moving higher and higher in an uncertain economic environment, it can be a cause for concern. Maybe investors have forgotten about these uncertainties surrounding the financial market—inflation is still around, credit conditions are likely to tighten in light of bank struggles, and the debt ceiling has still not been solved. The PCE data released on Friday morning shows that inflation is still a worry. The CME FedWatch Tool shows a higher probability of a 25 basis point rate hike at the next Fed meeting. 

So in the midst of these uncertainties, why is there a massive buying surge in a handful of big tech companies? Blame AI.

FOMO on the AI Rally

A handful of stocks are riding higher on the AI buzz. Here’s what’s interesting: if you look at the entire S&P 500 index, its performance isn’t in sync with the performance of these top five stocks—AAPL, MSFT, GOOGL, AMZN, and NVDA. These five stocks are trading above their 50-, 100-, and 200-day moving averages. But if you look at the percent of S&P 500 stocks trading above their 200-day moving average ($SPXA200R), it’s below the 50% level (see chart below). The chart in the bottom panel is the $SPX, which is trending higher. So there’s a divergence between the two.

CHART 1: PERCENTAGE OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE. Even though the S&P index is trending higher, the number of stocks trading above their 200-day moving average is still less than 50%. Chart source: StockCharts.com (click chart for live version). For educational purposes only.

And if you compare the performance of $SPX with the S&P 500 Equal Weighted Index ($SPXEW), the two were pretty correlated until March 2023, when $SPX experienced greater moves (see chart below). Then, from early May, $SPXEW moved lower while $SPX moved higher. The divergence between the two shows that the heavily weighted stocks in the S&P 500 are carrying the index higher.

CHART 2: S&P 500 EQUAL WEIGHTED INDEX VS. S&P 500 INDEX. The S&P 500 equal-weighted index equally weights all the stocks in the index. Notice the divergence between the $SPXEW and $SPX in the last few months.Chart source: StockCharts.com (click on chart for live version). For educational purposes only.

To see how one stock impacts the S&P 500 index, look at how NVDA stock surged after its earnings announcement. The stock made headlines—its market cap almost reached $1 trillion after its earnings boost.

NVDA has had a StockCharts Technical Ranking (SCTR) above 70 since January 2023. And its relative strength against the S&P 500 index ($SPX) spiked along with the stock price after knocking earnings out of the ballpark (see chart below).

CHART 3: IS THE AI RALLY REAL? NVDA is a large AI player with a massive influence in the market. It’s spreading its AI love to other big tech stocks.Chart source: StockCharts.com (click chart for live version). For educational purposes only.

When equities keep rising quickly, there’s always the fear that prices may fall back to reasonable values. A big question among investors is, “Is there an AI bubble brewing, or is this rally real?” There’s a chance that the stock prices of some of the larger, more AI-centric companies could pull back, but, if AI catches on, what about some of the laggards who could also gain from the AI wave?

Most small-cap indexes have some catching up to do to come close to the returns from the Tech sector. If AI does take off as forecasted, then there’s a possibility that several companies that will have to adopt AI into their operations could also benefit from the AI surge. This includes many semiconductor companies that have yet to have a stronger hold in the AI department.

Final Thoughts

So if you missed out on the AI rally in the large-cap AI-centric stocks, give it some time. Things could get extremely competitive as more players enter the field, more partnerships are established, and AI broadens its reach across different industries.

The AI excitement makes it look like the market has forgotten about the debt ceiling, inflation, and possible interest rate hikes. That’s not to say you shouldn’t take advantage of trading opportunities. You should, as long as you do so without losing sight of the big picture. Monitor the fundamentals, market internals, and price action among the market laggards.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

When rocket green flares fly across the space, it is so hard to chase in terms of risk management. Friday’s example of Marvel (MRVL) moving 40% in a week after Nvidia lit the fuse one day earlier is amazing to watch.

Friday saw the Nasdaq 100 soar by more than 2%. The Nasdaq is up 7% on the month!

It sure feels like understanding macro technical analysis is a waste of time this month. An index of large cap stocks that hold CRM, AAPL, MSFT, CSCO, INTC, IBM is making lower highs for three weeks now and the low was a 7-week low.

In my newsletter, I always insert a picture hinting at something going on. A sunset, a sunrise, a storm or a rainbow, they all convey a message. Last week, I posted a picture of a ladder. A narrow advance going higher. This week, Nvidia rocked the world with optimism around AI. After that announcement, we have seen the whole AI list of names shoot higher. However, there was a wider response through some different industries on both Thursday and Friday.

Names like Adobe, Workday, Monday, are joining the party and are in the technology sector.

IBM, the owner of Watson the AI tool, with ads that we had seen for years, is finally getting a bid, up 2%.

Goldman Sachs is trying to change the chart shape from down to up potentially. Near 8-week lows to start Thursday, it is now making 3-week highs.

You see credit card debt exploding, and American Express is going higher, breaking a downtrend.

Looking at so many pieces of macro information, it seems so odd. The Shanghai Composite breaking down to 4 month lows after making fresh highs in early May.

The Hong Kong Hang Seng is worse.

The UK stalling out.

Germany, the economic engine of the Eurozone, stalling out.

France, one of the best performing markets on the back of high luxury products, rolling over.

I could post a few more, but it comes down to one thing in my view.

America is the easiest place to invest in the AI trade, and that could garner inflows. It is also a country with a lot more technology companies that have come through the Silicon Valley incubator. Bringing the semiconductor manufacturing on shore is a big deal and semi’s are clearly leading the way. How much it broadens out into other sectors and industries remains to be seen.

Can financials, discretionary and energy turn up to join them? Maybe it doesn’t matter and we should avoid our technical bias and run with the church of what is working. Software and semiconductors are working. As big companies in the $SPX and $NDX they continue to drive the indexes higher. Perhaps another leg has just begun.