Two More Reasons To Trust The March Gains

It was a quarterly performance for the stock market that not even the bulls expected at the start of the year. The major averages closed out the month and quarter with solid gains on Friday. In Friday’s trading, the small-cap Russell 2000 (IWM
IWM
) led the way up 1.9% but the powerhouse Invesco QQQ
QQQ
Trust (QQQ) was a close second up 1.7%.

The QQQ was identified in January as a market leader, taking over from the Dow Jones Industrial Average which had been leading since last October. For those who still feel a recession is now even more inevitable after the banking crisis, the strength of the Nasdaq 100 has not been convincing. For some, it is negative and while they might be right about an eventual recession that fear likely kept many out of stocks for the past three months

The Nasdaq 100, which is tracked by the QQQ, had a 3.3% gain that was topped by the 5.3% gain in the Dow Jones Transportation Average last week. The iShares Russell 2000 was up 3.9% while the S&P 500 rose 3.5%.

The performance gap on a year-to-date (YTD) is even more striking as the Nasdaq 100 gained 20.5. Over the past ten years that was only exceeded by the 2^nd quarter gain in 2020. Even though the 7% YTD gain for the S&P 500 or the 8% in the SPDR Gold Shares were good by normal standards they paled by comparison. Investors for the quarter in the Dow Jones Utility Average are down YTD. This further emphasizes the need for careful sector selection.

The Spyder Trust (SPY
PY

SPY
) has recorded three strong weeks and looks ready to challenge and probably surpass the resistance at $416.72. The weekly starc+ band is $424.49 with the August high at $426.37.

It was another strong week for the market internals as on the NYSE there were 2792 issues advancing and just
just
411 declining. All of the weekly advance/decline lines, except for the Russell 2000 are now positive. The S&P 500 A/D line has moved sharply above its EMA but made a marginal new low in March so is not yet in a clear weekly uptrend.

The NSYE
SYE
Stocks Only A/D line is stronger and now needs to overcome the resistance at line c for an important upside breakout. The uptrend in the weekly NYSE All A/D line is even stronger and it is the broadest measure of the three.

Two other daily indicators based on the NYSE Composite data just turned positive Thursday as it closed just above the new 2^nd quarter pivot at 15,356. The McClellan Summation Index is a running total of the McClellan Oscillator readings and both were developed by a very smart and nice couple Sherman and Marian McClellan whom I had the pleasure of meeting several times.

For the Summation Index on the NYSE I have added a 13 period weighted moving average that can help identify the turning points such as those that occurred at the August highs and October lows. There was a positive cross on January 6, line a, that lasted until February 10th. Last Thursday there was a positive cross at line c. It should be noted that over decades of watching the Summation Index the signals are not always as clear as in this example.

I also follow the McClellan oscillator on a daily basis and I found the use of trendlines as well as the crossing of the zero line can be very helpful in trend determination. At the start of last week the downtrend, line d, and the zero line were both overcome.

Given the recent stock market performance the negative sentiment of both professionals and individuals is somewhat surprising. The most common argument I hear is that the inverted yield curve has always warned of a future recession. Certainly, a recession is possible this year or next but I concluded early in my career that always or never were not the terms to use on either the stock market or science.

The weekly chart of the S&P 500 includes the bullish % readings from the weekly survey from the American Association of Individual Investors (AAII). The bullish % represent the number who think that the S&P 500 will rise over the next six months. The February peak in the bullish %, point 1, coincided those who turned positive just before the market’s correction.

The difference between the bullish and bearish readings is often used to identify extremes in sentiment. In the latest survey 22.5% were bullish and 45.6% were bearish so the difference was -23.1%. As pointed out by the commentary from AAII “Bullish sentiment is below its historical average of 37.5% for the 69th time out of the past 71 weeks.” Bullish readings last spring were the lowest since 1993.

April is a strong seasonal period for the stocks market but there will likely be sharp setbacks during the month. I would not chase ETFs or stocks that are more than 5% above their 20 day exponential moving averages as that is likely to make the risk too high and you may regret not buying lower.