From the desk of Willie Delwiche.

The S&P 500 fell 1.5% on Monday and rebounded with a 1.5% gain on Tuesday. These were the 31st and 32nd daily moves of 1% or more so far in 2021. At this point last year, we had experienced 72 daily swings of 1% or more, the most we had seen by July in at least two decades. While 2021 has been a drop off from last year’s torrid pace, it’s nothing compared to what was seen in 2017 (which had just 4 moves of 1% in either direction at this point, and finished the year with just 8). What is amazing about 2021 is how closely it has matched the median experience of the past 20+ years. So far this has been a year that is remarkable in its unremarkableness.

From the desk of Willie Delwiche.

A recurring theme when it has come to market breadth is that while it has not been keeping pace with the indexes, it has not been breaking down. That is starting to change. Net new highs have turned negative on a 21-day and 63-day basis as divergences are starting to look more like meaningful deterioration. If they turn negative on a 52-week basis (shown below) it would suggest a more significant breakdown in breadth and a building of downside risks in the indexes.

From the desk of Willie Delwiche.

I might be old school, but I like to look within the Financials sector for leadership trends that provide some clues for the path of the market overall. Specifically, I keep an eye on what Banks and Broker/Dealers are doing on an absolute basis but also relative to the S&P 500. The XBD bottomed versus the S&P 500 early last year and led the rally into Q1 2021. The BKX began leading a bit later, but its relative strength carried further into this year. Both now have rolled over and are moving lower versus the S&P 500. As we have shown recently, the XBD/SPX ratio tends to move with our risk on/risk off ratio and so a breakdown in the Broker/Dealer index may be a warning signal about the overall risk backdrop.

From the desk of Willie Delwiche.

The S&P 500 finished June at its highest level ever. For the first time since August 2020, however, this was a new monthly high that was not confirmed by the equal-weight version of the index. Moreover, it was the first time since Sep 2018 that the equal-weight version of the index was actually down (ever so slightly) for a month in which the S&P 500 made a new high. This is evidence of a market that has lost some of the harmonies that helped sustain strength in recent months.

From the desk of Willie Delwiche.

The weight of the evidence is neutral and we’ve been discussing how it has been and remains a messy environment for stocks. We can see this in our Risk On/Risk Off Ratio which has been consolidating for several months. What caught our attention recently is how closely this ratio has moved with Emerging Markets. When looking for evidence of whether the market is poised to break out (which some indexes suggest it is), break down (which some breadth divergences suggest is a possibility), or continue to move frustratingly sideways (which seems to be a minority view at this point), we would start with this chart. If the Risk On/Risk Off Ratio and Emerging Markets are making new highs, the cyclical is probably ready to resume. If they are moving lower, a deeper correction for stocks could be in store. While they continue to move sideways, it probably remains a “less is more” kind of market.

From the desk of Willie Delwiche.

From the desk of Willie Delwiche.

After several failed attempts, the S&P 500 managed to make a new closing high on Thursday. The percentage of stocks making new 21-day highs (lower pane) did not expand as the index moved into record territory, but the percentage of stocks making new 21-day lows (upper pane) did. In fact, we’ve never before seen this many stocks making new short-term lows with the index making new all-time highs. This is not the sort of beneath the surface action you tend to see when a market is gaining strength for a sustained rally. Rather, it speaks to a continuation of what we have seen of late -  a choppy environment where less is more and cash on the sidelines is good for both mental and financial health.

From the desk of Willie Delwiche.

From the desk of Willie Delwiche.

From the desk of Willie Delwiche.

From the desk of Willie Delwiche.

From the desk of Willie Delwiche.