Mid-week market update: Even as the equal-weighted S&P 500 touched another all-time high today, it was a marginal upside breakout.
Here are the bull and bear cases for the near-term outlook.
Bull Case
Risk appetite indicators are confirming the stock market advance. Credit market risk appetite, as measured by the relative performance of junk bonds, and equity risk appetite, as measured by the relative performance of high beta to low volatility stocks, are tracking S&P 500.
Semiconductor stocks, which have been the market leaders, have reached fresh absolute and relative highs.
Bear Case
On the other hand, I remain concerned about the narrowness of the slow grind-up by the S&P 500. The equal-weighted S&P 500, mid-cap S&P 400, and small-cap Russell 2000 are underperforming the S&P 500. These are signs that only a few megacaps are leading the advance.
As well, breadth indicators are exhibiting negative divergence warnings.
The relative performance of defensive sectors presents a mixed picture. Though the results aren’t definitive, two of the sectors appear to be trying to turn up and the other two are attempting relative bottoms. If this continues, this would constitute a bearish warning of rising correction risk.
Flying Blind
The government shutdown has meant that the closely watched September Payroll Report won’t be available this coming Friday, which leaves the market (and the Fed) flying blind. The ADP report of private employment showed a negative print, and August was also revised downward. The top panel of the accompanying chart shows that ADP has virtually no predictive value against the first NFP report, though the correlation against subsequent revised NFP figures are better.
What does this all mean for stock prices? In the absence of BLS top-down data, investors may have to rely on bottom-up results from Q3 earnings season, and for guidance on the likely effects of tariffs on operating margins.
Nike reported a double beat of revenue and earnings this morning, but warned of a $1.5 billion tariff headwind as gross margins continue to deteriorate. The stock is up on the beat, but can this continue for the market overall if a tariff-induced margin squeeze becomes the prevailing theme during earnings season?
Is Nike the first shoe to drop? (Pun intended). Stay tuned.
