Last week’s breakout in the S&P 500, accompanied by an uptick in advancing volume, suggests there is conviction behind the new buying demand, says Ari Wald, Technical Analyst at Oppenheimer.
Overall Wald thinks that market conditions are firming following a summer of consolidation and he recommends being positioned for a bullish Q4. He sees the prior decline in participation as oversold firepower rather than a bearish warning of narrowing breadth. As such, while only 57% of stocks on the NYSE are above their 200-day moving average (similar to readings at the S&P’s May 2015 peak), Wald believes market breadth will broaden rather than prices will fall. His main reasons are:
1. The duration criteria of a market top have not been fulfilled (see Chart 1)
2. Credit spreads are not flashing a warning as they were in 2015 (see Chart 2)
3. Key market areas, like small caps, transports, banks and Europe, are finding demand at support rather than breaking down