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Upside Momentum Builds on Trump Rally

There is a stock market crash ahead. But that doesn’t make today any different from any other day. And while the bears are growling the charts are saying we are about to see prices increase at an accelerating rate.

A bull market does indeed climb a wall of worry at times, and this is one of those times. With protestors out en masse; countries, cities, and states fidgeting over Trump; and the political pressure building on both sides of the aisle, there is no shortage of reasons to worry. Yet in the realm of technical analysis the green light has just brightened as the market has just broken out to new highs that have been properly confirmed by multiple momentum indicators. Yes, I know that things could change in a hurry. But in the world of investing you have to stick with what’s working until it stops working.

The CNN Greed Index is in the Greed zone with a reading of 69, and the number of put options being bought by investors is shrinking. Both of these indicators suggest that we are closer to a market top than to a market bottom. Yet, the problem with sentiment analysis is that it is not always a useful market timing tool. The best we can say right now is that the market is on a momentum run and that when things reverse the selling could be aggressive.

Money is Moving into Stocks

Investing momentum refers to the direction of prices when they are overwhelmingly headed in a single direction. And right now we seem to be in the early stages of acceleration of momentum. This type of market is usually lucrative while it lasts, but always ends badly for those who hang in too long, which is why all investors should be cautious but should participate in at least a portion of the rally. 

The Standard and Poor’s 500 stock index (SPX) delivered a new high on Feb. 10 after a multi-week trading range. The new high came on steady volume, a slight question mark, but the rally shows staying power given the upward slope of the On Balance Volume indicator (OBV) and the positive crossover of the MACD oscillator and the MACD Histogram indicators (MACD).

OBV is telling us that buyers are overwhelming sellers even though their numbers may be less than they might be. The MACD crossover is a sign that momentum to the up side is rising. The relatively neutral Money Flow Index (MFI) suggest that this market is still not fully engaged, suggesting that not everyone has thrown caution to the wind, and that there is still potential money on the sidelines waiting to come into stocks. 

Advances Drown Decliners

And while the MACD is a measure of momentum, the NYSE Advance Decline line is a measure of liquidity. That’s because when more stocks advance than decline, money is moving into the markets, which is what we’re seeing on a regular basis. And the more new highs on the AD line, the more bullish the overall market picture becomes. 

Even more bullish is the fact that the S&P 500, the Nasdaq 100 (NDX), and the Russell 2000 (RUT) index of small stocks are all in sync and moving higher. This is a very bullish configuration of indicators which says that the slow steady money coming into the markets is flowing equally between the large cap stocks (SPX and NDX) and the small stocks (RUT). 

The relative lack of volume means that the rally is suspect, if you look at historical trends. But these aren’t the good old days and mainstream analysis of many things has seen a few setbacks lately. Things have indeed not been the same since the Trump election, which means that the old rules may or may not apply, at least for now.

In this context, viewed only as a market analysis, not as a political statement, the moderate volume which is leaning toward buyers is bullish. Another way to look at it is that since many still doubt this market, regardless of what the naysayers may say, it is more likely to be in the early rather than the late innings of what could be a sizable advance. So far, the market has followed this script and until it shows us something else, a steady upward trend remains the most likely direction of prices.

 


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