Even with the impressive bounce heading into the weekend, the S&P 500 last week didn’t even get back up to its December high. Meanwhile nearly 10% of the industry groups in the S&P 1500 and more than 10% of global markets closed at new 52-week highs. That’s the longest new high list by the rest of the world in nearly a year.

More Context: The last decade has conditioned investors to look to the S&P 500 for leadership. Many have concluded that if US large-cap stocks are not showing strength there isn’t much opportunity in equities. That is becoming an expensive assumption. Our global equity work is tilting away from US exposure and within the US, large-cap growth is approaching max underweight. Getting stuck in the last decade’s paradigm means not seeing the strength that is emerging in this new environment. The S&P 500 continues to move sideways between its June low and August high and is contending with a challenging trend backdrop. It’s time to turn the page on that index and embrace new...

The conditions for the re-birth of a bull market were met earlier this month, but the confirmation of strength has been underwhelming. Of the six indicators on our bull market behavior checklist, only one is currently meeting the bull market criteria.

More Context: Our bull market behavior checklist is a balance of breadth & price indicators, designed to reflect persistent turns toward risk or opportunity. We don’t want to be so focused on what is happening at home that we lose sight of what is happening overseas, so we use both US and global market data. These indicators are not discrete signals that can be overly influenced by day-to-day volatility (of which there has been plenty) in recent months but are ongoing measures that reflect a continuous environment. While our checklist is not indicating a healthy breadth of bull market behavior, it would be premature to suggest that the rally off of the Q4 lows is on its deathbed. But after last week, the rally has gone from feeling tired and rundown to...

Coming into this week, we’ve seen more new highs than new lows every day so far this year. Improved breadth helped fuel a higher high for the S&P 500. But with the index dropping back into its December range and new highs struggling to expand, the going, for now, is getting rough.

More Context: If our perspective just goes back to the late-September/early-October lows, the pattern on the S&P 500 is an encouraging higher low followed by a higher high accompanied by improving breadth. If we push back a little further, we still get breadth improvement but the S&P 500 pattern is more ambiguous. This month’s higher high could be an eerie inverse of last fall’s lower low (which quickly reversed), though we haven’t seen enough deterioration to this point to argue for more defensive tactical positioning. So long as the S&P 500 is above the June lows and below the August highs, acknowledging that sideways is a direction would not be inconsistent with the cyclical weight of the evidence that is in...

The Value Line Geometric Index peeked above its August high but it continues to struggle with sustaining strength. We don’t have evidence at this point of that being a meaningful peak but for now this proxy for the performance of the median US stock is trodding across well-traveled ground.

More Context: The Value Line Geometric index has a penchant for living between round numbers. In the years prior to COVID, it moved up from 500 to 600 and back down to 500. During 2020, it dropped to 300 before recovering and settling in beneath 500. A break above that level led to a quick test of 600, Further strength carried it to 700 in late 2021. It paused at 600 before spending most of last year moving back and forth between 500 and 600. After a strong start to the year for stocks, some near-term consolidation (especially in the US) would not be surprising. If recent patterns hold, that could mean the Value Line Geometric Index moving back toward 500. If that scenario is going to play out, we are likely to see more...

The number of stocks making new lows remains negligible. Last week, the number of stocks making new 52-week highs on the NYSE + NASDAQ surpassed a number of prior peaks (Dec 2021, Apr 2022, Nov 2022). It’s now at its highest level since November 2021.

More Context: Everyone has their own definition of a bull market. For me, it’s when more stocks are making new highs than new lows. Bear markets tend to end when new lows drop below new highs. Bull markets are sustained when new high lists expand. We are seeing that now among individual stocks and we are seeing that at the industry group level (especially outside of large-caps). In moving from 2022 to 2023 we have transitioned from broad weakness to broad strength. Big day-to-day price swings haven’t gone away, but after volatile years (like we experienced last year) that can be slow to ebb. Most of the strength that looks sustainable is happening beneath the surface of the popular benchmarks or beyond the borders of our country. It’s a new year with new...

2023 is on the cusp of producing as many days with new highs greater than new lows in its first month as 2022 produced over the course of the entire year. Yet there are hurdles to overcome to convincingly argue that this recent strength is sustainable.

More Context: From a macro data and Fed policy perspective, this week holds the promise to be pivotal. That is no less true from a price perspective. More stocks making new highs than new lows is bull market behavior. The S&P 500 not clearing its December high (in the context of still declining longer-term trends) is not. In addition to further trend improvement, renewed expansion in the number of stocks making new highs and continued recovery in our industry group trend indicator would be evidence of rally sustainability. Our equity models aren’t waiting for “what ifs” and while the S&P 500 is an option, it’s not the only one. Our equity positioning is increasingly outside of the US and away from large-cap growth stocks.             

In our ...

The S&P 500 has rallied off of its October and December lows, but the 200-day average, which rolled over in April 2022, continues to fall.

More Context: Price trends matter. Over the past 2+ decades, all of the net gains for the S&P 500 have come when the index’s 200-day average has been rising. When the trend has been falling, the index has struggled to keep its head above water. While stocks have begun 2023 in rally mode, they are still fighting a downtrend. Stocks can rally within persistent downtrends. But if stocks keep rallying, down-trends cannot persist. The math just doesn’t work. While we are seeing evidence of a tactically more constructive environment, the longer-term trend backdrop remains challenging. The recent strength has a better shot at being sustained if it can flip some of the longer-term trend indicators to a bullish setting.           

In our Market Notes, we take a closer look at longer-term price trends, recent breadth improvements and paradigm shifts that are...

New highs exceeded new lows last week for the first time since August (and only the third time since November 2021). That is a positive development but there is more work to be done before concluding that a new bull market has been reborn.

More Context: With this week’s improvement, our bull market re-birth checklist now has two out of the five criteria satisfied. It’s heading in the right direction, but 2022 was full of bounces that were not sustained and strength that did not persist. Big moves in both directions was a key part of last year’s experience, which saw the S&P 500 recording the 3rd most 3% up weeks and the 3rd most 3% down weeks in the past 70+ years. Further, we are seeing relative trends point to new leadership (equal-weight over cap-weight in the US; the rest of the world over the US on a global basis), but in most cases, the new leaders remain in longer-term down-trends. If we want to get more constructive on equities as an asset class, that needs to change.       

In our ...

Sector-level trends are deteriorating - every previous time this happened this year, the S&P 500 went on to make new lows. 

More Context: Our sector-level trend indicator looks at momentum, price and breadth trends across the 11 S&P 500 sectors. It captures the breadth of these trends more than the intensity (the table inside the report shows the details). The mix of trends has ebbed and flowed by indicator and by sector this year. But every previous time the composite indicator has dropped below zero since the S&P 500 peaked in January, new lows have followed. If that pattern holds, the S&P 500 could soon find itself testing its October low (which is not what many of the seasonal studies would suggest is likely right now).      

In our Market Notes, we take a Deeper Look at the price evidence arguing for & against a test of the Q4 lows and what that could mean in the context of a challenging longer-term trend environment.

The S&P 500 fell 3.4% last week, the 11th time this year that the index was down 3% (or more) in a single week. Only 2008 and 1974 had a larger number of such declines. Paired with the 9 times the S&P 500 has rallied 3% or more in a single week this year, 2022 has now moved ahead of 2009 and is only in third place (still behind 2008 and 1974) with 20 weekly swings of 3% or more in either direction.

More Context: Stock market strength and volatility have been inversely correlated for decades. Volatile years tend to be weak and quiet years tend to be strong. The decline in the S&P 500 last week alone was larger than the largest peak-to-trough decline experienced over all of 2017 (one of the quietest and most consistently strong years in stock market history). This year’s volatility has been accompanied by the smallest percentage of days with more new highs than new lows in more than 50 years. While we are seeing relative leadership shift, persistent strength remains elusive.      

In our ...

Our longer-term risk indicator has been in the Risk Off zone since the beginning of the year. Successive rally attempts have taken it closer and closer to a Risk On signal, but so far it has been unable to break through. 

More Context: This indicator, which is calculated based on where various intermarket & intramarket asset ratios are relative to their 52-week trading range, was the sole criteria on our Bull Market Re-Birth Checklist that did not turn positive earlier this summer and it continues to offer a cautious message. The persistence of more new lows than new highs adds weight to that view. After the latest rally off of year-to-date index lows, there is still little evidence that a sustained turn higher is in the works. Fear has been relieved but strength is struggling to emerge. Our tactical models suggest that expecting price bounces to persist is defying history. There are pockets of opportunity, but this remains an environment for selective equity exposure not broad buying and longer-term...

Just when 2022 was getting known for noise, the markets quieted down last week. For the first time in five weeks, the S&P 500 did not move 3% in one direction or the other. For the first time this year, no trading day last week saw the S&P 500 move 1% or more in either direction. We begin a new week with the S&P 500 not having moved 1% or more in either direction in six straight days. It has been a year since it has had a longer streak of small swings.

More Context: In the past half century, the only years with more 1% daily moves than 2022 were 2008 and 2002. Before this recent run of quiet, the S&P 500 had moved by 1% on more than half of the trading days. Historically there is an inverse relationship between volatility and strength. In the past half century, no year had fewer 1% moves than did 2017 (which had fewer for the entire year than 2022 is averaging per month). When daily volatility subsides, prices typically rise. That was the case in 2016-17, mid-2018, late-2019, and (to a lesser...