Major Moves

While Wall Street seems to be largely shrugging off concerns about trade tariffs and the back-and-forth trade war rhetoric between the United States and China, not all sectors have escaped unscathed.

The materials sector has been hit especially hard. The tariffs that have already been put in place between the United States and China have reduced trade between these two economic giants. Plus, traders are concerned about the potential of a global economic slowdown. Both factors have been a drag on raw materials producers as demand for commodities has slackened – especially from China, which historically has been an enormous commodity consumer.

You can see this drag in the performance of the materials sector during 2019 compared with every other sector in the market. I've used SPDR sector-based exchange-traded funds (ETFs) to illustrate this in the chart below.

The Materials Select Sector SPDR ETF (XLB) is up only 5.85% this year, while the Industrial Select Sector SPDR ETF (XLI) has grown by an impressive 15.37%. Watch for this trend of underperformance to persist as the Trump administration continues to negotiate with its Chinese counterparts.

Performance of S&P 500 sector ETFs

S&P 500

The S&P 500 took a break from closing at new highs today, but it is still showing signs of strength as the stochastics indicator remains firmly in overbought territory.

New traders often make the mistake of believing that seeing an oscillating indicator, like the stochastics, in an overbought position – which is any time the stochastics rises above 80 – means that the index has moved up as high as it can go and is ready to turn around. However, oscillating indicators can remain overbought for extended periods of time.

For instance, it's a sign of strength for the trend when the stochastic consolidates above 80. Only when the stochastics drop back below 80 after having been above that level should traders start to worry about a reversal of momentum.

Knowing this, I wouldn't be surprised to see the S&P 500 continued drifting higher next week – even if the market does experience a little profit taking on Friday heading into the long three-day weekend.

Read more:

Performance of the S&P 500 Index

Risk Indicators – Market Breadth

Market breadth indicators come in a variety of formats. Some give shorter-term outlooks, while others give longer-term outlooks, but they all provide insight into the health of the market as a whole.

One of my favorite market breadth indicators is the S&P 500 Stocks Above Their 200-Day Simple Moving Average. The name of the indicator is pretty self explanatory – it shows the percentage of stocks in the S&P 500 that are trading above, or at, their respective 200-day simple moving averages (SMAs). I like this indicator for a variety of reasons.

First, there is no ambiguity in the indicator. A stock either is, or is not, trading above its 200-day SMA.

Second, it provides a longer-term trend outlook. The 200-day SMA is the industry standard for assessing the long-term trend of a stock. Typically, when a stock is trading above its 200-day SMA, it indicates that the stock is enjoying longer-term bullish momentum. Conversely, when a stock is trading below its 200-day SMA, it indicates that the stock is enduring longer-term bearish momentum. Focusing on longer-term trend helps eliminate a lot of the noise that bombards the market on a daily basis.

Third, the indicator looks at a broad range of stocks. By covering the entire S&P 500, it gives you insight into every sector of the stock market instead of narrowly focusing on one or two sectors.

So what's happening with the S&P 500 Stocks Above Their 200-Day Simple Moving Average indicator right now? The indicator broke above 50% this week for the first time since October 2018. This is big news because it shows at least half of the S&P 500 components are experiencing enough bullish momentum during this recovery to push them back above their 200-day SMAs.

When you compare that to the woeful state of affairs on Christmas Eve 2018 when less than 10% of S&P 500 components were trading above their 200-day SMAs, you can appreciate just how dramatic this bullish turnaround has been.

Of course, it is important to remember that the 200-day SMAs for these stocks have likely dropped to much lower levels than they were at during September 2018 when the S&P 500 reached its all-time high, but seeing this confirmation of renewed, broad-based bullish enthusiasm on Wall Street is a good indicator that the market in general is healthy. We don't need to worry that the index is only being driven higher by a few key components while the rest of the stocks are languishing.

Read more:

S&P 500 stocks above 200-day average

Bottom Line: Strong but Realistic

While the stock market continues to show multiple signs of strength, Wall Street is also indicating it has realistic expectations for the future. This is a healthy sign for the market. Enthusiasm is good, but too much enthusiasm could spook traders and burn up any available bullish fuel too quickly.

Read more:

Enjoy this article? Get more by signing up for the Chart Advisor newsletter.