Alteration in attitude, clear sky in the offing?

Following a decline lasting nine days at a rate of 5.86% in October, it was the recent five-day surge of 5.85% that has given hope to investors. This was evident on Thursday when the weekly survey from the American Association of Individual Investors (AAII) indicated that the number of individuals anticipating an upward movement in the S&P 500 over the next six months rose to 42.6% from 24.3% last week.

As per AAII, this marked the most significant rise since July 10, 2010, albeit still lower than the 51.4% uptrend recorded on July 19th. This figure exceeds the historical average of 37.5%, and it’s worth noting that a similar bounce in February 2023 was linked to the subsequent market correction. The recession percentage dropped from 50.3% last week to 27.2%, now well below the historical average of 31%.

In last week’s analysis, I determined that the likelihood of a pullback was quite high given the previous week’s activity and various overbought readings. However, shares experienced only a minor dip on Thursday before further gains on Friday.

Overall, the week exhibited mixed outcomes with the Nasdaq 100 leading with a gain of 2.9%, trailed by a 1.3% increase in the S&P 500. The Dow Jones Industrial Average also registered a 0.7% increase.

The iShares Russell 2000 once again lagged, experiencing a 3.1% decline during the week and now 1.9% lower year-to-date (YTD). SPDR Gold shares were not far behind, losing 2.9%, while the Dow Jones Utility Average declined by 2.6% for the week, now down 13.4% YTD.

Market internals on the NYSE reflected a discernible negative shift with a 967-point movement and a decline of 2022. Meanwhile, on the Nasdaq Composite, the A/D ratio was at a negative 2-2. What instilled optimism in many analysts and traders?

For some, it was likely an unfounded belief that the Fed had raised rates. The Fed, including Fed Chairman Powell, emphasized this conclusion last week. For others, it was the robust price action of Invesco QQQ
QQQ
. Both the Trust (QQQ) and, to a lesser extent, the S&P 500 surpassed their October highs.

The remarkable 10.5% gains in QQQ from a low of $342.35 in late October have been notable, outperforming the annual performance in 2015 and 2016. The closing at $378.39 exceeded the October high of $373.74 and broke the downward trend from the July high at $388.70, Line A. The next significant barrier is at this level. The 20-week EMA has risen and is now at $360.57.

The Nasdaq 100 Advance/Decline line moved above its WMA last week and closed above the downtrend, Line B. This typically signifies the end of a correction. Relative performance (RS) has consistently supported the QQQ throughout the year and made another new high last week by surpassing the resistance line C. QQQ still leads the market.

Spider Trust (SPY
PY

detective
Close at $440.61 and above the October high, though still beneath the summer high. The blue solid line represents the closing price of the NYSE Composite, which notably exceeds the broader market average in comparison to the S&P 500.

The NYSE failed to record a new high alongside the S&P 500 in late 2021 (see red arrow) and has been trailing since. This trend has been evident since the July high, breaking below support at Line A and falling well below its June low while the S&P 500 did not.

The weekly S&P 500 Advance/Decline line is even weaker than the Nasdaq 100, closing just 2 points above its EMA. The peak in July anticipated a new high for the S&P 500, but it later breached support at Line B. The downward trend from the last two peaks, line 2, has not been overcome.

The lagging action of the NYSE Composite may be attributed to the bond funds involved; however, one would expect the NYSE Stocks Only A/D line to be stronger, but this has not been the case. The NYSE All A/D line is also negative but has slightly improved from the October low.

Both weekly NYSE A/D lines are in a downtrend, exhibiting lower lows and lower highs. Strong numbers this week could push them above their previous highs, but significant effort is needed to match the QQQ A/D line. The action of the NYSE A/D lines contradicts the recent Zweig breath thrust buy signal.

For stocks, it was another favorable week with growth overshadowing value. The Growth iShares Russell 1000 (IWF)
iwf
) surged by 3%, while the Price of the iShares Russell 1000 (IWD
iwd
) dipped by 1%. This shift marked a change in the IWF/IWD ratio above the resistance at Line A on October 2.^Ra, indicating robustness in favor of growth. Daily MACD analysis confirmed the ratio’s positive turn last week.

Despite being bullish for most of the year, the market’s rally since the October lows and the disparities in market insiders are now leading me to exercise caution. It is presently overextended, with certain growth ETFs and stocks showing noticeable upward potential. Approaching the month’s end, global uncertainties and US funding deadlines also escalate potential risks.