Mid-week market update: The S&P 500 has become an index of behemoth NVIDIA and everything else. The all-time high experienced by the S&P 500 in mid-June was largely attributable to the price action of NVIDIA. The rest of the market, as measured by the equal-weighted S&P 500, has been trading sideways for several months and never exceed the highs reached in late March.
Will the S&P 500 continue to rise, or is it destined to correct in the short run? The answer is “yes”. Here are the risks and opportunities.
The bear case
The bear case is easy to make. Semiconductor stocks, which have led the latest advance, are exhibiting signs of a loss in price momentum on both an absolute and relative basis.
If the semiconductors falter, can the rest of the market pick up the leadership baton? Don’t be so sure. The relative performance of cyclical stocks have been weak across the board, indicating a loss of macro momentum.
Speaking of momentum, different measures of the momentum factor, which measures whether stocks that are outperforming continue to outperform, has been flat to weak.
Sentiment, as measured by the put/call ratio, is low and appears frothy. Similar readings were indicative of short-term tops in the past.
I interpret these conditions as a stock market that’s vulnerable to a setback.
The bull case
On the other hand, the usually reliable S&P 500 Intermediate Term Breadth Momentum Oscillator (ITBM) recently flashed a tactical buy signal with its 14-day RSI reverted from oversold to neutral. This is a sign that the non-NVIDIA part of the market is starting to recover its price momentum from an oversold condition.
As well, the equal-weighted ratio of consumer discretionary to S&P 500 stocks is turning up, indicating positive risk appetite, which is a bullish sign.
So where does that leave us? I believe that technology stocks, and semiconductors in particular, are showing signs of bullish exhaustion and vulnerable to market weakness. On the other hand, the rest of the market is starting to rebound from weak oversold levels, which could put a floor on stock prices. It’s unclear whether the bulls or bears will prevail in the short run. My base case scenario calls for a period of near-term choppiness.
Tactically, investors could see some short-term volatility. The S&P 500 is consolidating after an upper Bollinger Band ride and anything can happen in the coming days. Thursday night will be the Presidential debate, followed by the PCE report Friday morning, which could be another source of market turbulence.
