Are Stock Market Bulls Getting More Risky?

The stock market can often be a challenge heading into a holiday-shortened week. For traders, many worry about holding positions into a long weekend or adding new positions before a partial day of trading like last Friday.

The prior week’s doji formations in the S&P 500, Nasdaq 100, Dow Jones Industrial Average, and NYSE Composite could not be ignored especially in a short week. Dojis are formed when the opening price and the closing price for the period are about the same. They are often considered a sign of decision as the buyers and sellers end up at the same price.

This candle formation is not bullish or bearish by itself but after a well-established rally, the close below the doji low generates a bearish signal. Also after a well-defined downtrend, a close above the doji high generates a bullish signal as discussed in a prior article.

Therefore, I suggested last week that investors and traders watch to see if these averages closed below the prior week’s lows. They did not!

At the start of the week the daily advance/decline lines were positive but in my opinion, needed stronger numbers to project even higher prices in market-leading indices like the S&P 500. As I noted in a Tuesday AM Tweet they were only slightly negative Monday as they improved by the close. The very strong early numbers on Tuesday shifted the outlook in favor of the bulls.

For the week the Dow Jones Utility average led the way closing up 3.5% as it is close to moving above its 200 day SMA at 977. The Dow Jones Industrials also had a good week as it gained 1.8% as it again closed above its 200 day SMA. The S&P 500 was not far behind as it is approaching its 200 day SMA at 4056.91 after it was 1.5% higher.

I was not surprised that the growth-dominated Nasdaq 100 struggled only gaining 0.7% but the iShares Russell 2000 did a bit better. For the week the advancing issues were the solid winner as 2426 issues were advancing and 935 were declining.

The Spyder Trust (SPY
PY

SPY
) was able to close above the prior week’s doji high at $402.31 indicating a test of the downtrend, line a, at $410. There is further resistance at the August high of $429.96 and a move above this level would support the view that a major stock market bottom is in place. The 20 week EMA is at $391.10 and a weekly close below this level would a concern

The S&P 500 vance/Decline line rose sharply last week which supported the prior positive move above its WMA. There is major resistance at line c, which if surpassed would be a clear sign that the this was more than a bear market rally.

The outlook for the Invesco QQQ
QQQ
Trust (QQQ) is not nearly as positive as it closed below its 20 week EMA at $289.14 and the prior week’s doji high of $293.26. This level needs to be overcome to signal a move towards the downtrend, line a, at $304.08. The weekly starc+ band is at $314.03. There is important weekly support, line b, at $263.04.

The Nasdaq 100 vance/Decline line moved back above its WMA but is back to resistance at line c. This makes this week’s numbers more important as if the A/D number are negative it could drop back below its WMA.

The relative performance (RS) is still below its declining WMA which indicates that QQQ is weaker than the SPY. The downtrend in the RS, line d, needs to be overcome to suggest that QQQ is going to be a market leader and that is unlikely to happen soon.

All of the daily A/D lines are positive and made new rally highs last week. They are well above their rising MAs which is a positive sign for the week ahead. Before we see a meaningful correction the A/D lines will typically drop below their MAs before a significant stock market decline.

The interest rate trend is still for lower yields as there were clear signs of a top at the start of November. That was confirmed by the subsequent break of the support at line b. There is next good support in terms of yield in the 3.563% to 3.483% to area, line c. A drop to the 3.200% area, line d, is not out of the question as we head towards the December FOMC meeting on December 13-14th.

The MACD and MACD-His analysis is still negative as they completed their topping patterns in October. The MACDs have made new lows but not the MACD-His so it will need to be watched in the weeks ahead.

As traders become more bullish, they often start to move into historically more risky investments. The hopes for a so-called Fed pivot increased last week and that is reflected by the fund flows into junk bond ETFS like the iShares iBoxx $ High Yield ETF (HYG
HYG
).

Bloomberg reported the largest two months of fund flows, $13.6 billion, to high-yield corporate bonds like HYG in October and November. The weekly chart of HYG, which has a yield over 5%, has rallied from the October low of $70.13. The downtrend, line a, is a bit above last week’s close at $75.78 with major resistance in the $78 area.

The on-balance-balance (OBV) is barely above its WMA and has not convincingly moved above the downtrend, line b. The OBV did not form a new low in October so it shows a potential positive divergence, line c. HYG needs a much higher volume rally to confirm the divergence.

In contrast to HYG, the volume analysis looks much stronger on the gold futures and SPDR Gold Trust (GLD
GLD
) which were discussed after Friday’s close. It is not surprising that based on the one-month performance versus the S&P 500 the Materials Select (XLB
XLB
) has outperformed by 7.5% followed by the Industrials Select (XLI
XLI
) and Financial Select (XLF
XLF
).

In my weekly stock scan, there are a number of attractive chart patterns for the week ahead. The 250 min futures analysis turned negative on Friday so we could get some profit-taking early in the week. That should be a buying opportunity. I would suggest that you continue to focus on the market leaders and despite the current bullish readings always pay attention to the risk.