Welcome to my video presentation for Tuesday, September 24. The article below is a condensed transcript; my video contains additional details and several charts.

The stock market has been on a tear lately. It begs several questions.

Does the rally have momentum? Is the rise in equities mostly due to a handful of mega-cap leaders or are we enjoying greater market breadth? Following the Federal Reserve’s interest rate cut last week of 50 basis points, are yields rising or falling?

Let’s examine the technical indicators to see what they’re telling us. First, a few words about moving averages.

Moving averages help investors observe the direction of the trend, whether it’s upward, downward, or sideways. When a stock’s price is above the moving average, it’s typically seen as a bullish sign, and when it’s below, it’s often considered bearish. Shorter moving averages are used for short-term trading, while longer-term moving averages are better suited for long-term investors.

The S&P 500, as measured by the benchmark SPDR S&P 500 ETF Trust (SPY), has risen well above its 20-, 50- and 200-day moving averages. Each moving average offers insight into different time horizons.

The alignment of SPY above all three averages indicates that short-term, medium-term, and long-term trends are all pointing upward, which is a strong buy signal for technical traders. It suggests that investor sentiment is optimistic, as buyers are stepping in across various timeframes.

However, a sharp rise above these averages can also signal that the market is potentially overbought, meaning a correction or consolidation may be on the horizon.

That’s where the Relative Strength Index (RSI) comes in. For the SPY, the RSI hovers at 62, which is within the bullish zone.

RSI is a momentum oscillator used in technical analysis to measure the speed and magnitude of a stock’s price movements. A reading of 70 and above signals the stock is overbought, meaning it has likely risen too quickly and may be poised for a correction or pullback. A reading of 30 and below is considered an oversold signal, meaning it has likely dropped too quickly and may be due for a bounce or reversal.

Despite the stock market’s recent rapid rise, the SPY’s RSI currently occupies the middle spot and it’s flashing a buy signal.

What about market breadth? Let’s examine the New York Stock Exchange Advance/Decline line (NYAD).

The NYAD is a key market breadth indicator used to gauge the overall health and direction of the stock market. It measures the difference between the number of advancing stocks (those that close higher) and declining stocks (those that close lower) on the NYSE each day.

The NYAD helps investors understand the overall participation of stocks in a market rally or decline. A rising market with a rising NYAD indicates broad participation, signaling a healthy market. Conversely, if the market is rising but the NYAD is falling, it could indicate that fewer stocks are participating, warning of potential market weakness or an impending reversal. The NYAD has been sharply rising, which is bullish.

Now let’s review the movement of the 30-year U.S. Treasury yield, which is often viewed as a risk-free benchmark because U.S. government bonds are considered one of the safest investments.

When yields rise, the returns investors can get from bonds increase. This can make bonds more attractive relative to stocks, which carry higher risk. As a result, higher yields can put downward pressure on stock prices as investors shift toward bonds. Conversely, when yields fall, bonds offer lower returns, pushing investors toward riskier assets like stocks in search of higher returns.

Rising Treasury yields are associated with rising interest rates, as well as greater inflation risk. In the current environment, the 30-year yield has been falling over the long term due to cooling inflation. However, after the Fed’s big rate cut, it has edged higher, as investors anticipate a spike in economic growth and a slightly higher risk of inflation.

That means, despite the overall bullish trend of the 30-year Treasury yield falling below its 50- and 200-day moving averages, its recent rise above the 20-day threshold could be a cause for concern. The yield bears especially close scrutiny, as economic growth reignites.

The technical indicators I’ve just examined paint a generally bullish picture. This overall positive outlook is further supported by the fundamentals, such as robust corporate earnings growth and a resilient economy.

The emerging sector leaders…

Amid the environment I’ve just described, we’re witnessing sector rotation, whereby the laggards of last year have become market leaders. Among the most promising sectors right now are industrials, real estate, and utilities.

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John Persinos is the editorial director of Investing Daily. You can reach John via mailbag@investingdaily.com

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