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No breadth thrust, but a slow grind-up

Summary:
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. Improving internals 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

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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.
 

No breadth thrust, but a slow grind-up
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.

Improving internals

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.
No breadth thrust, but a slow grind-up
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.
No breadth thrust, but a slow grind-up
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.
No breadth thrust, but a slow grind-up

Lessons from market history

On the other hand, the lessons from market history are mixed. Almanac Trader 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.”
No breadth thrust, but a slow grind-up
Ryan Detrick 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. 
No breadth thrust, but a slow grind-up
Detrick 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).
No breadth thrust, but a slow grind-up
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
About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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