Last week’s 5.9% rally in the S&P 500 was the best single-week gain since June but it was not enough to shift any of the criteria on our Bull Market Re-Birth Checklist.
The S&P 500 was down last week but remains above its June lows and below its August highs.
More Context: We can look up at the summer highs on the S&P 500, but as long as more stocks are making new lows than new highs the risk is that it is the summer lows that are in jeopardy of being broken. The degree and duration of downturns since 2015 has varied but a clear pattern has emerged: rallies are difficult to sustain if fewer stocks are making new highs than new lows. Clearing the August high for the S&P 500 likely means seeing the NYSE + NASDAQ new high lists getting longer than the new low list (which has happened only twice in the past 50 weeks).
Beyond the mega-cap earnings-related blow-ups of last week, the rally off of the mid-October lows quietly gained strength. At Friday’s close, more than 55% of S&P 500 stocks were trading at new 20-day highs. In our work, that is a breadth thrust - the first since July and only the second since June 2020.
More Context: After stocks were uncharacteristically weak following the July breadth thrust, investors may be more cautious about embracing the latest signal. In this environment it is entirely possible that breadth thrusts are more evidence of volatility than strength. Over the course of my career I have tended to “trust the thrust”, but also believe it is a case of “thrust, but verify.”
The new low list peaked in May and the new high list bottomed in July. Despite this, we’ve had more new lows than new highs in 44 of the past 46 weeks.
The Details: More than 4400 stocks (48% of the total on the NYSE + NASDAQ) made new lows in May. That was the most since March 2020. The new low list has ebbed and flowed since then but has not surpassed that peak. The 116 stocks (just 1% of NYSE + NASDAQ total) that made new highs in the first week of July was the fewest since April 2020. Last week 357 stocks (4%) made new highs and 1645 (18%) made new lows.
US industry group trends are at a new low for the year and are approaching washed out levels. Take out the Energy groups and virtually nothing is in an up-trend.
The Details: The industry group trend indicator looks at 4 weekly trend metrics for each of the 72 industry groups in the S&P 1500 (24 each for small-caps, mid-caps and large-caps). The higher the number, the broader the strength at the industry group level.
A 14% rally in Energy last week (its 3rd best weekly gain in at least the past 30 years) was not enough to keep the long-term in the Energy sector from rolling over last week. This follows the down-turn in the long-term trend in commodities that we discussed last week.
The Details: The longest sustained up-trend in the Energy sector since prior to the Great Financial Crisis has ended. The trend for the Utilities sector also turned lower last week. For the first time since the COVID crisis none of the 11 sectors in the S&P 500 are currently in up-trends.
You need to squint to see it, but the long-term trend in the CRB Commodity index fell last week for the first time since the end of 2020.
The Details: This uptrend, the most persistent since 2002-2006, lasted 94 weeks. During that period, the CRB index was up nearly 70%. Over the past two decades, the CRB index has been trending higher 60% of the time and has risen at a 7.3% annual rate during those periods. It has fallen at 5.5% annual rate during the remaining 40% of the time (when the long-term trend has been falling).
The S&P 500 is testing its mid-June low as it remains in a persistent down-trend. Investors and traders can lean against specific support levels, but it is hard to have high levels of conviction when price and breadth trends continue to decline.
The Details: At 24 weeks, the current down-trend has lasted longer than any since the Financial Crisis ended in 2009. Prior to the feast or famine years of the past quarter century, persistent downtrends were normal market behavior.
Worst six month stretch ever has investors in an exceedingly bad mood.
The June index-level lows are holding for now, but the response to the breadth and momentum thrusts that accompanied the summer rally has been somewhere between uninspiring and historically bad. On the one hand, the S&P 500 was essentially flat in the month following July 28 breadth thrust signal based on a surge in the percentage of stocks making new 20-day highs and even now is not outside the range of what has been seen in the past. The mid-August signal based on surging 40-day momentum, however, has been followed by unprecedented weakness.
Getting back to “Yes” on our Bull Market Re-Birth Checklist still requires some heavy lifting.
Beneath the surface, stocks are getting back in gear.
The Fed isn’t a friend and overcoming higher bond yields could be a challenge for stocks.
Stocks turned higher last week, and while Friday saw more new highs than news on the NYSE for the first time in two weeks, it was not enough to prevent a third consecutive week of new lows outpacing new highs (on both the NYSE and NASDAQ). Friday’s strength was sufficient to produce an encouraging up-side volume thrust and our short and intermediate-term risk indicators moved back into positive territory last week. If stocks can build on that progress, we could soon be hitting “Yes” on a number of our Bull Market Re-Birth Checklist criteria. But there is still plenty of work to be done.
Powell’s tough talk justified by incoming inflation data.
Slowing growth unlikely to derail Fed’s plans.
Bull market re-birth struggling with labor pains.
Our bull market re-birth checklist took a step backward but a tough labor does not preclude a successful delivery. Without new complications from a macro perspective, we are willing to be patient and trust the thrust. At the same time, however, so far this year stocks have yet to show that they can sustain strength when yields and the dollar are rising. If the market is taking the Fed at its word, then higher bond yields are likely to be seen this year, in the US and around the world. Japanese yields are again approaching the 0.25% level that the Bank of Japan has targeted as a ceiling for yields. When that happened in Q2, the yen suffered.
Macro concerns testing resiliency of market bulls.
There has already been a steady increase in expectations of a 75 basis point rate hike when the FOMC meets in September. More importantly, expectations that the Fed will cut rates soon after the tightening cycle is complete have faded. This is leading to renewed upward pressure on bond yields (which have been experiencing their most sustained uptrend in the past 40 years). In periods of elevated inflation, stocks and bonds tend to become positively correlated. That has been on full display this year, as balanced portfolios have been mired in a more persistent downtrend than any other experienced in the past decade.
