Risk environment is still cautious as downtrends linger.
Macro situation is a concern but has not been causing stress.
Breadth thrusts are firing, participation is expanding and for the first time this year new high lists are longer than new low lists. From the perspective of market internals, the rally over the past two months could hardly have been stronger.
This strength is showing up in our bull market re-birth checklist. July brought upside volume thrusts and the first breadth thrust (based on the percentage of stocks making new 20-day highs) in over two years. Last week brought to an end the string of 37 consecutive weeks of more new lows than new highs on the NYSE+NASDAQ. The trend in our net new high advance/decline line also turned higher.
Noisy price swings can obscure underlying downtrends.
Bulls holding serve on rally but hardly pressing an advantage.
The price moves in this environment have been impressive in both directions. One-quarter of the stocks in the NASDAQ are more than 50% above their 52-week lows, but more than 40% are still 50% or more below their 52-week highs.
Last week, for the first time since early April, more stocks on the NASDAQ made new highs than new lows. That ended the consecutive streak of days with new lows > new highs at 83. This was more than two weeks longer than the previous record stretch (which ended in December 2008 - prior to financial crisis lows). Like many of the stocks that make up the index, the NASDAQ Composite is well off its lows. But it is still more than 12% below where it was the last time new highs exceeded new lows.
Fed in spotlight as Powell & Co move rates to last cycle’s peak.
A dovish pivot when financial stress has never been lower seems unlikely.
Persistent bear market leaves bulls needing to prove their case.
While high relative to the previous decade, the Fed could in 2019 at least make the argument that inflation and wage growth were low from a historical perspective. Additionally there was evidence that financial stresses were starting to build. Now, the wage and price pressures that were still incubating in 2019 have erupted to their highest levels in decades while at the same time the financial stress has never been lower (according to the St. Louis Fed’s index).
For evidence to improve we need to see sustained strength.
Fed confronted with deteriorating economy while still waging inflation fight.
When new lows have exceeded new highs for 34 weeks (and counting) and the Value Line Geometric Index (a proxy for the median US stock) is no higher now than it was five years ago, even small amounts of good news get celebrated. We saw some of that on Friday.
The first half of 2022 was one for the record books, but it was more dubious than distinguished. Only two years (2020 & 2009) in the past quarter century experienced more 1% moves in the first half than did 2022 and only one (2008) finished the year with a higher percentage of 1% moves than we have experienced in the first half of this year. Both stocks and bonds were down in back-to-back quarters for only the third time in the past 45 years. This contributed to the benchmark 60/40 stock/bond portfolio experiencing a first half of the year that was twice as bad as another in the past quarter century. According to data from Ned Davis Research, it was the worst first half for a balanced portfolio since the 1930’s.
Looking for signs of strength, not just absence of weakness.
Burden of proof is on the bulls to show that strength can persist.
At this point, we cannot know whether the current environment will ultimately end up bearing more than a passing resemblance to the 2008/09 financial crisis. There are, however, enough similarities between now and then that the comparison is worth considering.
Consider what we are seeing from a price perspective and across a handful of other indicators:
