Breadth Thrust Propels Market Higher

Over the last few days, the market's advance has broadened, with previously lagging sectors finally joining in. All indicators are now signaling a bullish trend.

I paused my posts for several weeks due to summer holidays and the lack of significant changes in market signals. During this time, the breadth trend remained positive across all timeframes, though at a low level. The major indices continued their uptrend, while the VIX stayed low and in a downtrend. The overall market picture was bullish but marked by narrow participation, with only technology, semiconductors, the Nasdaq-100, and the S&P 500 capturing bullish momentum. Most other sectors were choppy and struggled to sustain any rally.

This began to change last Wednesday when many lagging sectors started to trigger positive trend and momentum signals, just ahead of the CPI data release. I highlighted this development on my X account, which you should follow for real-time updates.

Following a lower-than-expected CPI report on Thursday, the market surged and sustained its rally through Friday. Today's futures indicate that the market will continue to move higher.

All my signals are now in bullish configurations:

All sectors are now in a short term and long term uptrend, with most of them outperforming the S&P 500 in the short term with the exception of the Nasdaq-100 (QQQ), Consumer Staples (XLP) and Energy (XLE)

A minor concern in the short term is that Friday's close triggered a market short-term overbought signal. This suggests we might see a slight pullback or some sideways movement as momentum cools off after several days of significant gains.

However, in this context, the overbought signal has more positives than negatives, serving as an indicator of the breadth thrust that occurred over the past few days. Historically, this type of signal is a very bullish development 90% of the time, making it highly likely that the market advance will continue over the next 3-6 months.

The chart of weekly returns from the past week clearly illustrates this massive breadth thrust.

Additionally, we are entering earnings season, which historically tends to be a bullish period for the stock market. This timing adds another positive factor to the current market outlook.

Conclusion:

We are finally seeing improving breadth, with the uptrend broadening to more sectors. After a series of big up days, chasing the market in the short term may not be wise. However, consider adding or buying on weakness in the coming days or weeks, as the odds of the market sustaining its move higher are very favorable.

That is all for today.

Have a great week.

Best regards,

Victor Riesco, CMT