Mid-week market update: I noticed on the weekend that there was a lot of excitement over the possibility of a Zweig Breadth Thrust buy signal, probably because of the strong advance last week. The stock market consolidated this week, and while the ZBT window closes Friday, the degree of breadth strength to achieve a ZBT is becoming a mathematical impossibility.
The market remains at a crossroad between bullish and bearish outcomes, but the prognosis is becoming more promising for the bulls.
The Good News
Here is the good news. Last week’s sharp advance form an Almost ZBT signal. Analaysis from
Zubu Trade found that such signals have been extremely bullish. I would caution that this study is straying into “torturing the data until it talks” territory. The sample size is very small (n=5). There were only two instances in the out-of-sample period after Marty Zweig published his ZBT model. Take these results with a grain of salt.
The bullish conclusion from Wayne Whaley’s Thanksgiving Week Barometer is more constructive and the study has a larger sample size (n=15). While Thanksgiving Week returns have experienced strong positive seasonality, Whaley studied instances when Thanksgiving Week saw S&P 500 returns of over 2%. If history is any guide, positive momentum has carried over into December and January.
A similar historical study based on a breadth thrust and strong price momentum theme using the NYSE McClellan Oscillator (NYMO) found similar bullish outcomes. Whenever the S&P 500 is up for five consecutive days and NYMO rose from oversold (under -55) to overbought (over 68) within a week, price momentum has tended to persist. I would highlight the strong price return from week 1 to week 2, which indicates a consolidation period followed by further gains, which appears to be the scenario today.
Waiting at the Crossroad
I highlighted the following chart on the weekend. The good news is the VVIX, which is the volatthe VIX Index, remains below 100 and it’s supportive of the bull case. The bad news is the S&P 500 hasn’t managed to convincingly break out above the rising trend line and a potential head and shoulders pattern is still in play.
The Fed will announce its interest rate decision next week. Consensus expectations of a quarter-point rate cut has rocketed to 89% from under 40% just two weeks ago, followed by two months of holding rates steady before cutting again. The Fed doesn’t like surprising markets. It’s highly likely to cut next week. But with the probability at 89%, the odds of a rate cut is already priced into the markets. The risk is the emergence of dissenting votes and a divided FOMC has the potential to spook markets and spark a risk-off response.
Lastly, a cautionary note comes from
Mark Hulbert, whose newsletter sentiment readings have reached a crowded long level. Stock and gold market sentiment are above the 90th percentile level, which calls for some degree of caution. The caveat is excessively bullish sentiment is a condition indicator and not an actionable sell signal. Bullish sentiment can stay elevated for quite some time before the market finally tops.
I remain constructive on the short-term outlook for stock prices. My base case calls for some choppiness and consolidation this week, followed by higher prices next week. But some caution about a “sell the news” event around next week’s FOMC rate decision is warranted.
