Breadth deterioration doesn’t have to be bearish just yet

Markets have snapped back this week despite ongoing deteriorating breadth issues and makes a solid case that a rally back to new highs for the major indices should be underway into year-end.  While SPX and QQQ barely suffered any of the deterioration as was seen in Equal-weighted indices and many sectors, it appears that DJIA along with SPX should press higher to join NASDAQ at new all-time highs. Despite the counter-trend bounce underway in both TNX as well as DXY, it’s unlikely that mid-November peaks are exceeded before the recent downturn follows through further to finish the year trending down. Overall, while backing and filling is possible next week ahead of the FOMC meeting, Rate cut odds remain at 98% this week despite a hotter-than-expected PPI report on Thursday.  Until/unless SPX and QQQ break the uptrend from early November (Near 6006), the bull market rally looks back underway after just minor consolidation.  Initial support for SPX lies near 6017.  

Thursday’s hotter-than-expected PPI did little to shake the market’s expectations for a rate cut next week, and that remains above 98%. Thus, while some investors might fret at a rising Unemployment rate and PPI having surpassed CPI now on an annual basis, it’s a known fact that the PPI doesn’t really affect core PCE, which is the Fed’s preferred gauge for inflation.

At present, it is important to reiterate that despite the ongoing uptrend in US Indices, breadth levels remain sub-par and have been deteriorating since September.  Given seven sectors falling in the last month, these breadth figures have actually worsened in December and have not improved, despite the market rally.

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