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Breadth Thrusts & Bread Crusts: A Look at the "Why?" Behind a Popular "What?"

August 25, 2022
JC Parets

From the desk of Willie Delwiche.

During our “Trendlines over Headlines” conversation last week, Patrick Dunuwila and I spent some time discussing seasonal patterns in the stock market. Among the inputs to our cycle composite is the 4-year Presidential Election cycle. The tendency for stocks to make a pre-midterm election low and then see sustained strength in the year between midterms and the Presidential election is well-advertised. The stats around this are pretty amazing. On average, stocks bottomed two months prior to the midterm election and, despite a few close calls, the S&P 500 has been higher one year after every mid-term election since 1950, on average nearly 15% higher.

This is often ascribed to the market’s preference for certainty. When the balance of political power is unknown, stocks weaken. When the outcome of the election becomes more obvious, stocks rally. This is regardless of which party that outcome favors. It’s a plausible story as far as it goes. 

[PLUS] Weekly Sentiment Report

August 24, 2022
JC Parets

From the desk of Willie Delwiche.

Key Takeaway:  It takes bulls to have a bull market. Seeing cyclical sentiment moving from pessimism to neutral in recent weeks has been fuel for the rally off of the June lows. From both a fund flow and survey perspective, investors have been increasing participation since mid-year. But with a robust appetite for Risk On assets still not apparent, the biggest risk from a sentiment perspective is that macro headaches fuel an uptick in pessimism that overwhelms the positive thrust developments of the past few weeks. That could lead to a more complete unwind from a strategic positioning perspective. For now, optimism is on the rise but far from excessive, and that tends to be a sweet spot for stocks.

Sentiment Report Chart of the Week: Households Hold On To Stocks

[PLUS] Weekly Market Perspectives - Macro Risks Worth Watching

August 23, 2022
JC Parets

From the desk of Willie Delwiche.

Key Takeaways:

  • Risk On appetite missing from recent rally
  • Bond yield momentum waning as financial stress remains low
  • Intact dollar uptrend and rollover in copper/gold ratio are equity market obstacles

In the wake of the breadth and momentum thrusts seen over the first half of August, the market seems to be arguing that the path of least resistance is higher as we move into 2023. The macro backdrop almost guarantees that the way forward will be strewn with rocks and roots. The question is whether the obstacles will be significant enough to derail or delay the journey. We will look at several macro-related indicators that could help us anticipate a more or less treacherous road ahead.

[PLUS] Weekly Market Notes

August 22, 2022
JC Parets
From the desk of Willie Delwiche.

Key Takeaway:

  • Rally has not produced risk on leadership.
  • Lack of stress keeps upward pressure on rates.
  • Macro concerns testing resiliency of market bulls.

There has already been a steady increase in expectations of a 75 basis point rate hike when the FOMC meets in September. More importantly, expectations that the Fed will cut rates soon after the tightening cycle is complete have faded. This is leading to renewed upward pressure on bond yields (which have been experiencing their most sustained uptrend in the past 40 years). In periods of elevated inflation, stocks and bonds tend to become positively correlated. That has been on full display this year, as balanced portfolios have been mired in a more persistent downtrend than any other experienced in the past decade.

[PLUS] Weekly Observations & One Chart for the Weekend

August 19, 2022
JC Parets

From the desk of Willie Delwiche.

With the latest surge, the S&P 500 has experienced 17 Momentum Thrusts since 1980. Excluding the signal from earlier this week, eight of these have been accompanied by Breadth Thrusts and eight have not. The difference in the market’s reaction to such moves could hardly be more stark. When accompanied by breadth thrusts, momentum thrusts see strength persist. In these cases, the S&P 500 has never been lower 1, 3, 6 or 12 months later. On average the S&P 500 has been 15% higher 6 months after these momentum thrusts and 25% higher 12 months after the thrust signal. Without a breadth thrust, surging momentum can be climactic and the S&P 500 can struggle to make any headway. The average return 12 months after such signals is less than half the average of all periods since 1980. We don’t hang our hat on any one indicator or single signal. But the combination of breadth and momentum thrusts experienced over the past few weeks suggests investors should be looking for stocks to go higher, not lower, from here.  

Breadth Thrusts & Bread Crusts: Perfect vs Good Enough

August 18, 2022
JC Parets

From the desk of Willie Delwiche.

I’ve got an old pair of Chaco sandals that I’m not ready to part with just yet. But the soles were becoming detached from the footbed, so I had to do a little repair work. 

I glued them up and started thinking about rigging a clamp to provide even pressure to help the glue set. Catching sight of a couple of bricks laying nearby, I realized that these would work just fine for this type of job.

Would a well placed clamp or two have produced a more textbook repair? Perhaps. But the bricks I had at hand worked just fine for this.

[PLUS] Weekly Sentiment Report

August 17, 2022
JC Parets

From the desk of Willie Delwiche.

Key Takeaway: Permabulls will almost always complain about rallies being unloved, just as permabears never leave their refrain that downside risks are under appreciated. That is the prism through which they view the world. In the current situation, complacency is rising and optimism is building, both from low levels. After the buying panic seen in the NAAIM data in July, we saw something similar in this week’s data from Consensus Inc (the largest one-week increase in optimism in over a decade). Even though bears still outnumber bulls on the AAII survey, equity ETF inflows are heating up. The shift from excessive pessimism to increased optimism is the most bullish part of the sentiment curve and that is where we find ourselves. Breadth thrusts and surging momentum are cherries on the top.

Sentiment Report Chart of the Week: Strong Momentum Doesn’t Usually Just Evaporate

[PLUS] Dynamic Portfolio Management

August 16, 2022
JC Parets

From the desk of Willie Delwiche.

Breadth is improving and our bull market re-born checklist has satisfied two more of its criteria. We are moving off the sidelines and getting more involved, increasing equity exposure in both the Cyclical and Tactical Portfolios and staying in harmony with current leadership trends.

[PLUS] Weekly Market Perspectives - Breadth Thrust! Now What?

August 16, 2022
JC Parets

From the desk of Willie Delwiche.

Key Takeaways:

  • Breadth thrusts and global strength have fueled the market in the past
  • Price patterns are consistent but participation is stronger now than in 2008
  • If June low was important, remainder of 2022 could see less volatility and more strength

The first half of 2022 was a great time to be on the sidelines, letting the bulls and bears bloody themselves in the market. Last year saw the previous breadth thrust regime expire in June and by November more stocks were making new lows than new highs. As 2021 turned to 2022, fewer and fewer world markets were showing any strength. The second half of the year is shaping up to be a different story, with a breadth thrust in July and a sharp expansion in the percentage of world markets trading above their 50-day averages, the conditions that have fueled all of the net gains in the S&P 500 in the past 40+ years are now present. 

[PLUS] Weekly Market Notes

August 15, 2022
JC Parets
From the desk of Willie Delwiche.

Key Takeaway:

  • Rally strengthens as participation broadens.
  • Risk environment is still cautious as downtrends linger.
  • Macro situation is a concern but has not been causing stress.

Breadth thrusts are firing, participation is expanding and for the first time this year new high lists are longer than new low lists. From the perspective of market internals, the rally over the past two months could hardly have been stronger.

This strength is showing up in our bull market re-birth checklist. July brought upside volume thrusts and the first breadth thrust (based on the percentage of stocks making new 20-day highs) in over two years. Last week brought to an end the string of 37 consecutive weeks of more new lows than new highs on the NYSE+NASDAQ. The trend in our net new high advance/decline line also turned higher.