Mid-week market update: I continue to believe that the stock market is vulnerable to a setback. It’s not just the negative RSI divergence, which is concerning, it’s the inability for breadth to broaden out that’s worrisome. As the accompanying chart shows, the equal-weighted S&P 500 to S&P 500 ratio stalled out at a relative resistance zone, and the Russell 2000 to S&P 500 has been in a relative downtrend.
Where’s the leadership that could lead stocks higher?
A lack of leadership
Here’s what’s working and what’s not. Starting with the laggards, large cap growth has been lagging the market for a few weeks. The NASDAQ 100 is bounced off a key relative resistance level, but relative breadth indicators (bottom two panels) are negative.
We can also see a similar effect by comparing new highs-new lows on the NYSE compared to NASDAQ. NYSE breadth has been performing better.
As large cap growth makes up about 40% of the weight of the S&P 500, I have trouble making the math work if these tech names weaken. In addition, a review of the value sectors show that only industrials are in a relative uptrend. The others are either flat or down.
That doesn’t mean that the market will immediately weaken. The relative performance of defensive sectors shows a mixed picture. Two are still turning up but the other two are either flat or down, indicating that the bears don’t have full control of the tape.
In other words, the market is confused. This doesn’t mean that prices will necessarily fall, but it can be vulnerable to a pullback.
The limits of momentum
While the recent exhibition of strong price momentum is encouraging, a study by Nautilus Research paints a more cautionary picture. While large swings by the equal-weighted S&P 500 has historically been long-term bullish, one-month returns have largely been weak.
Be near-term cautious.
The market feels and trades heavy like a big boulder that has been pushed up a steep hill. Unless we get a fresh piece of positive news it can roll back very easily. Valuations are high and it is not a guarantee that we have dodged the bullet and we will have a soft landing. Economic news is mixed, there are two wars raging. Keep a close eye on vix to see if there is a pick up in volatility.
These relative charts minimize the extent of movements. The bottom three defensive sectors when you do the math have underperformed by over 30%. That means they have gone nowhere and are a relative bargain. These three thrive when interest rates fall like they are doing now.