Above The 40 – A Stock Market Redressing Itself For A Meeting With The Fed

AT40 = 42.1% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 59.1% of stocks are trading above their respective 200DMAs
VIX = 11.7 (volatility index)
Short-term Trading Call: neutral

Commentary

The bear-bull fight is still a close call.

The February U.S. jobs report catalyzed the next swing in the stock market’s bear-bull knife fight. I noted in my last “Above 40” post a “remarkable” bearish divergence. The S&P 500 (SPY) completed a very benign reversal of its last bullish breakout, including a gentle bounce from support at its 20-day moving average (DMA) that skirted my threshold for going bearish on the index (a close below index’s breakout point). Yet, AT40 (T2108), the percentage of stocks trading above their 40DMAs, made another big step toward oversold conditions. If not for that warning, I would flip my trading call from neutral to BULLISH just based on the market’s response to the jobs report.

The S&P 500 completed a picture-perfect bounce off 20DMA support. Note that tightening Bollinger Bands (BBs) suggest a big move is imminent.

As expected, the volatility index (the VIX), retreated after the jobs report.

As I have noted in the past, a positive reaction to a strong jobs report is a good change of affairs. In the era of an easy and accommodating Fed, we watched the stock market celebrate bad jobs news in anticipation of a dovish Fed response and bemoan strong jobs reports in fear of the Fed. Just as we saw to start trading in March, the S&P 500 returned to marching with confidence toward a Fed rate hike in the coming week. AT40 even cooperated with a gain of two percentage points of 42%. This move does not eliminate the undertow of the market or the new bearish divergence, but it is a step in the right direction. Most importantly, this move increases the importance of the line separating the S&P 500 from bearish territory. My bearish threshold remains below 2355. If the index manages to stay above that level after the Fed finishes its business, the market should be in good shape to crawl, walk, and skip higher. In the latter case, I will keep the trading call at neutral in deference to the deteriorating technicals under the market.