4 Risk Indicators Suggest U.S. Stocks Could Be Breaking Out

bearbull1Taki Tsaklanos:  Stock markets have been nerve-wracking, to say the least. For some 18 months now, U.S. stocks have basically gone nowhere. That created two extreme camps among investors: bears who believe that a 2008-alike collapse is in the making, and bulls who are watching a breakout in the stock market. Who will be right?

It is very hard to say who will be right, as our risk indicators are not all aligned. However, since April of this year, we see some positive developments in favor of the bulls. Let’s review the chart of the S&P 500 as the bellwether of U.S. stocks, and assess 4 risk indicators from our methodological framework.

First, the chart pattern in the S&P 500 reveals that the breakout point is being tested right now. The S&P 500 is trading above its 90 day moving average (the only moving average in our methodology), which is a positive, though it has to hold. The line in the sand is 2034 points.

Next to that, we see a first of an uptrend in the making in the 90 week moving average, after a flat period. The bulls have the benefit of the doubt at this point.

US_stocks_weekly_May_2016

The NYSE Index, a broader index of stocks, broke out in April, see the red circle on the next chart. Most likely, a retest of the breakout area will follow, which is around 10,000 – 10,200 points, some 6 to 8% below today’s levels. If the breakout level holds, we have a confirmed uptrend.

NYSE_Index_May_2016

A widely followed risk indicator is the volatility index (VIX). We see that VIX broke down in March / April of this year, which favors the bulls. Right now, VIX is testing the trend line, so it can go both directions. Bulls have the benefit of the doubt though.

VIX_5_May_2016

One of the less followed risk indicators is the ratio between consumer discretionary (offensive) vs consumer staples (defensive) stocks. The underlying idea is that investors favor ‘risk on’ as long as consumer discretionary is outperforming consumer staples. So far, the ratio is still in favor of a ‘risk on’ sentiment. Similar to the VIX index, this chart is flirting with the trendline, but the bulls hold the benefit of the doubt.

XLY_XLP_ratio_May_2016

Last but not least, we consider NYSE market breadth an important risk indicator, in particular the number of advancing minus declining issues (cumulative).

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