The market is encroaching on what pundits are now calling an asset bubble. Whether we are in the beginning stages or later stages, it is clear that the stock market is highly overvalued. According to S&P Composite Index: Regression to Trend, the market is trading well above its trendline (monthly average of daily closes). Since December 2020, it is 154% above the trend line. Right now, investors are buying every dip and playing the musical chair game in hopes of avoiding the fact that the bubble will at some point pop. And when that does, the music stops and some will be left far out of the game. But for now, the market continues to rally. The S&P 500 rallied 1.9% this week. The Dow added 0.6% while the Nasdaq 100 surging 4.4%.
Big Picture
As we pointed out last week, the market was right above the 20 DMA, and that on 4 prior occasions, it bounced and made a recovery to the upside. And as we foretold before the start of last week, it also bounced off the 20 DMA and rallied up to the resistance (red dash) trendline (identified by our automation trendline algorithm).
The market right now is in a very strong uptrend.
Market Breadth
Market breadth continues to confirm the new highs in the broader indices. The number of stocks trading above their 200 EMA is well over 90%. The number of stocks up on our 5-day and the 10-day ratio is clearly in bullish momentum.
The chart below graphing stocks that are up 25% quarterly is well above 4000. The market indices breadth supports the current Rally taking place.
Market Sentiment
For the past couple of weeks, market sentiment has been irrationally exuberant and widely bullish. On 1/8, it hit a high of 69.32, and shortly after on 1/21 it hit 69.22. With easy credit, risky stocks that are outperforming in the market, and stretched valuations, it is clear that today's sentiment is at the enthusiasm phase. All this occurring within a one-year time span where we saw the sentiment cycle hit panic during the March 2020 stock market drop.
Economic Outlook
U.S markets were closed on Monday last week but there was overseas news that shows China is on track for a solid recovery. Back home, solid earnings reports were reported that showed literally every company reporting so far beating their EPS estimates (total earnings are up +7%). It is safe to say we are off to a strong start to the Q4 earnings season.
Long Leading Indicators
Looking below, the long leading indicators that measure financial stress is currently at low levels. Both the St. Louis Fed's Financial stress index and Chicago Fed Financial Conditions Index are at -0.74 and -0.62 respectively.
Leading Indicators
A majority of our leading indicators are mostly positive. NEw orders for consumer durables and non-defense capital goods have rebounded from the low of April 20. The housing market is hot with new building permits at a five-year high. Only the labor market as discussed in our prior blog is showing signs of weakness. This part of the economic data is what is truly holding back the economic recovery.
Market Outlook
All major indexes moved higher this week. The biggest move this week was in large-cap where tech and communications were the big winners for the week. Technically speaking, all major indices are in a very strong uptrend.
SPY
Looking at SPY on the weekly chart, it is clear it is in a major uptrend. On the daily chart, it has been consolidating for the past couple of weeks but all signs point to a strong rally.
QQQ
QQQ was trending down on the intraday but this week it broke out to the upside. Could it be that large-cap is back in play and ready to take over small caps?
Concluding
Though there are pundits calling for impending market top and bubble, it is clear that the current equity market is in an uptrend. Prices are moving higher and the EMAs are rising. The bulls are continuing to push the market to new highs. Sure, the market can change in a heartbeat but one can also choose just to be bearish. Maybe it is this inclination of skepticism toward the current rally is the reason why the markets continue to push higher.