Does The S&P Have Anywhere To Move?

It is safe to say the current stock market is frustrating.

But unlike 2013, when the environment favored the bulls for the vast majority of the year -- and it was the bears that wound up pounding their heads up against the wall -- in 2014, both teams appear to be experiencing some frustration.

The bottom line is simple: From a big-picture standpoint, stocks won't go up, and yet the S&P 500 can't seem to go down either.

Related: Cheer Up! A Portfolio Pep Talk For Investors

While the S&P 500 finished Friday at a fresh all-time high, it did so by the slimmest of margins. Take a look at the chart below. Is that a breakout? Or simply a set-up for another in a long string of "fake-outs"?

S&P 500 Daily 

Usually, when such a question occurs, it pays to review the charts of the other major indices. In short, if the DJIA, NASDAQ and/or Russell 2000 confirm the move in question, it is safe to assume that a breakout is a breakout. However, in this case, nothing is clear.

Dow Jones Industrial Average Daily 

In looking at the chart of the Dow, it is clear that there is no breakout confirmation evident. In fact, there is still some important resistance overhead to deal with.

The NASDAQ, which was impacted by the recent momentum meltdown couldn't be farther from confirming an upside breakout either.

NASDAQ Daily 

However, an argument can be made that the downtrend in the NASDAQ may have ended. In order to confirm that the worst of the decline is behind it, the NASDAQ will need to continue to move up in the coming week and, perhaps more importantly, NOT fall back below the 4150 area.

On the other hand, the chart of the micro-caps, which bore the brunt of the mo-mo meltdown, continues to look ugly.

iShares Micro-Cap ETF IWC Daily 

However, those seeing the glass as half-full will argue a base could be forming in the micro-cap space. And as one may recall, the key to the overall market moving up from here is for the micro-caps to STOP going down. They don't necessarily need to rebound. No, these beaten-down stocks just have to stabilize.

So Is The Environment Improving, Or Not?

Whenever this type of environment occurs, it is usually best to put one's emotions aside and review the readings of some market indicators. In short, it can be quite helpful to look at cold, hard numbers when things are "iffy".

To be clear, it is a good practice to review market indicators on a daily basis. However, looking at indicators over different time frames is an important way to diversify one's analysis.

The "State" of the Market Environment

Although there are some overlapping areas, the Weekly Environment Model is comprised of ten individual indicators or models. These ten can then be broken down into the following categories: tape, trend, sentiment, economic, monetary and the overall risk environment.

In terms of weighting, the majority of the model weight is given to tape and trend indicators (60 percent) while the "external" factors account for 40 percent of the model. This fits with the view that one's overall objective is to stay in line with what the market IS doing.

In short, whenever there are questions, the price/tape action of the market should always be viewed as the final arbiter. In addition, tape and trend indicators serve as excellent stop-loss signals for those times when the market's moves diverge from the "logic" of things like economics, news or earnings.

Due to changes in data availability, the overall model was reworked at the end of 2011. However, the live performance hasn't been too bad. In 2012, using the leveraged ProShares Ultra S&P 500 SSO when the model was positive, the ProShares Short S&P 500 SH on negative signals, and a cash equivalent on neutral signals, the test of the model would have produced a return of 46.2 percent (compared to the S&P 500 cash index return of 16.3 percent).

Then in 2013, the model's return would have been 38.30 percent, versus S&P 500's return of 33.26 percent. So while the history isn't long, it does seem worth watching what this model has to say each week.

Since the explanation of the models and indicators that make up the weekly market environment model as well as the analysis of the current readings covers a fair amount of ground, the review will be broken up over the week.

The Trend Indicators

The weekly environment model contains three indicators that are dedicated to the trend of the overall market. For starters, it rates the short-term trend of the S&P 500. For the purposes of this model, short term is defined as between five and 15 trading days.

Next is the intermediate-term trend of the market. Here the focus is primarily on the market relative to its 10-week weighted moving average (which is moved forward two periods). And finally, a cycle composite is examined, which is combination of the one-year seasonal, four-year presidential and ten-year decennial cycles.

Currently, the short-term trend rating is moderately positive, as the S&P is above its short-term moving averages, which themselves are also moving higher at this time. See the first chart in this report if there are any doubts about this rating.

The rating of the intermediate-term trend is positive. A quick peek of the S&P 500 weekly chart versus its 10-week moving average should confirm this rating.

S&P 500 Weekly 

And finally, the cycle composite suggests that stocks should move higher next week. So the rating for the cycle composite is positive.

When assigning a score of +1 for positive readings, 0 for neutral readings and -1 for negative readings, the overall rating for the trend components comes in at +3 for the upcoming week.

The Tape Indicators

The weekly environment model incorporates three "tape" indicators. These are the indicators that reveal the internal health of the market and helps to determine the "oomph" behind a move in either direction. The tape indicators include a breadth-confirmation system, a review of the supply/demand volume and a model that rates the technical health of more than 100 S&P industry groups.

Currently the tape indicators remain fairly strong. The breadth-confirmation system is positive as both the trend of the market and of the stock-only advance/decline line are above their appropriate smoothings.

Next, the supply/demand volume relationship indicator is neutral at this time. Although demand volume remains well above supply at this stage, the trend of demand volume is down.

And finally, the model that rates the technical health of more than 100 industry groups is moderately positive at this time. So, while these indicators are all intermediate-term or longer in nature, the group as a whole is positive.

The bottom line is that both the trend and tape components of the overall environment model are currently positive - albeit not strongly so.

Positions in stocks mentioned: SPY