An old Wall Street adage says that what everyone knows isn’t worth knowing. Based on preliminary forecasts, “everyone” expects the earnings season just getting underway to be the worst in more than two years.
 
From a sentiment perspective, it means “everyone” is bracing for a sell-off and the market rarely does what everyone expects. In fact, in Monday’s early trading the small capitalization Russell 2000 index notched a fresh all-time high before easing (see Chart 1).

Chart 1

Russell 2000

It is hard to be bearish about an index that has set all-time highs in four of the past five months. And from the long-term view, in February it broke out to the upside from a 16-month trading range suggesting months of gains are ahead.
 
To be sure, short-term momentum has waned, opening the door to a small pullback. However, the index remains above all major moving averages and money continues to flow into the iShares Russell 2000 exchange-traded fund according to the on-balance volume indicator. In other words, the charts look pretty good.
 
The Standard & Poor’s 500, representing the largest stocks, does give a weaker appearance as it has not made much progress since November. One theory is that the U.S. dollar’s strength is hurting earnings in this group of internationally exposed companies and that may be true. But even so, the patterns on the S&P 500’s charts are still more positive than negative.
 
For example, the long-term trend is still to the upside (see Chart 2). And more than a few sectors are enjoying good inflows of money, again according to the on-balance volume study. This indicator keeps a running total of volume on up-days minus volume on down-days. If the bulls are more aggressive then theoretically they are more active as prices rise and money flows into the respective stock or ETF.

Chart 2

Standard & Poor’s 500


Last month, the biotech sector surged to a high before settling into a steep pullback. The semiconductor sector was also strong before a very sharp decline. The loss of these two leaders could have created a leadership vacuum and problems for the market unless other groups took over.
That’s when the energy sector woke up (see Getting Technical, “Oil Exploration Stocks Have Bottomed: Sanchez, Pioneer, Callon and More,” Apr. 6).
 
In the financial sector, the SPDR S&P Bank ETF has seemed to just churn for the past year. But lately it has been hovering just below important resistance (see Chart 3).

Chart 3

SPDR Bank ETF


Chart watchers believe that the longer a stock or ETF stays near resistance the more likely it is to successfully break out. Of course, the bank ETF has not broken out just yet but with positive technicals from moving averages to long-term momentum readings the odds are favorable. If and when it does break out, the market should get another engine on which to ride.
 
Another key sector for a bullish market – technology - also enjoys good inflows of money. The Select Sector SPDR Technology ETF is close to a new high on-balance volume reading despite still being down roughly 3% from its early March high. That suggests investors demand shares and Monday the ETF poked its head above the trendline that guided it lower since the high.
 
The other two sectors that I believe are key for the market – homebuilding and retail – are still outperforming. And last week, biotech and semiconductors scored nice rallies to get back in the hunt.
 
The point of all this is to show that leadership in the market has actually broadened. And on an individual stock basis, the NYSE advance-decline line continues to push into new high territory. If the market is on shaky ground it is not showing up in the charts at all.
 
Again, that does not mean a pullback cannot happen and indeed the S&P 500 did back down Monday afternoon after reaching the top of a two-month pattern. However, there is still too much going right for the bulls at this time to prevent higher prices in the coming weeks and months.
 
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.