Mid-week market update: I recently highlighted the possible development of a rare momentum-based Zweig Breadth Thrust buy signal (see The Zweig Breadth Thrust watch). The window for the ZBT buy signal closes tomorrow (Thursday). While the S&P 500 has been advancing slowly, we are unlikely to see the buy signal barring some gargantuan melt-up tomorrow.
However, the failure of the ZBT buy signal doesn’t mean that the outlook has turned bearish. Instead, the stock market appears to be undergoing a slow grind-up.
From a technical perspective, many of the negative divergences from poor internals have been improving. While the NYSE Advance-Decline Line has not made a fresh high yet despite new highs in the S&P 500, the percentage of S&P 500 and NASDAQ stocks above their 50 dma have been steadily rising.
Similarly, credit risk appetite, as measured by the relative price performance of junk bonds to their duration-equivalent Treasury counterparts, have also been steadily rising.
Sentiment readings are likely to put a floor on stock prices should they pull back. The latest Investors Sentiment Survey shows a decline in bullish sentiment and a rise in bearish sentiment. The bull-bear spread is consistent with past trading bottoms, not tops.
Lessons from market history
On the other hand, the lessons from market history are mixed. Almanac Trade
r pointed out that the month of September is one of the worst for stock market returns since 1950. The poor historical returns appear to be a statistical anomaly. In the last 17 years, he observed that “S&P 500 has advanced 11 times in September and declined six times.”
is another market historian with a different take. The S&P 500 has risen for seven consecutive months. Such episodes have resolved with strong positive returns over a six-month time horizon 13 out of 14 times.
also found that whenever the S&P 500 rose 15% or more by the end of August, the rest of the year tends to have a bullish bias. Price momentum lives (notwithstanding the Crash of 1987).
I interpret these conditions as the market is ripe for a slow grind-up. While stock prices could weaken at any time, any pullbacks should be shallow and there are few signs of a major correction on the horizon.
Disclosure: Long SPXL