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.
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.
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.
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.
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.
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.
While new highs are being seen around the world (Europe, Frontier Markets) and in the US (Broker/Dealers, Real Estate, Energy), there is still plenty of attention on former leaders who are trying to reclaim their lost glory. A great example of that is the ARK Innovation ETF (ARKK). This fund peaked at the height of speculative fever in February and has since made a series of lower highs and lower lows. It’s now dealing with rejection as its latest rally attempt petered out shy of the confluence of the 50 and 200-day moving averages. When viewed in context of overall declining NASDAQ volume, it suggests stronger hands have been selling to weaker hands and they are the ones that are going to be left paying the tab at the end of the night.
We had fun with this one all week. We can frame it in the context of Ford’s aggressive foray into the EV market or more narrowly as an expression of suburbanite luxury truck preferences. It fits well within the growth to value conversation as well as “old is new and new is old” themes. Even if it’s not seen strictly as a pair trade, it reflects a shift in investor interest and preference. After establishing a big base versus Tesla (one which looks an awful lot like an inverted head-and-shoulders pattern), Ford is poised to break out and move into empty space.
Every streak comes to an end. After a record 243 consecutive days of positive readings, the US economic surprise index slipped below the zero line this week. For a mean-reverting index that has historically spent as much time above zero as below zero, this was a remarkable stretch of better than expected data. While the data now is as strong as it has been at any point in the last year (in some cases, decades), expectations have now surpassed reality and so the surprise index is moving lower. This removes what had been a tailwind for equities and allows for a test of the resiliency of the current rally. Coupled with the tightening financial liquidity conditions and changing risk appetites, this could make for a choppy summer in the stock market.
The one chart is actually two charts this week. On the left is the S&P 500 and the percentage of stocks in that index that are above their 200-day average (90%). On the right is the NASDAQ Composite and the percentage of stocks in that index that are above their 200-day average (50%). The contrast could hardly be more stark. Even as weakness has been seen in some of the largest sectors (like Technology), the S&P 500 is being supported by ongoing strength in cyclical values areas. The NASDAQ has little to no exposure to those sectors that are doing the best right now and is bearing the brunt of speculative excesses being unwound (the collapse in equity call options is evidence of this shift).
The headlines this week focused on the, for lack of better word, carnage in some of the most speculative areas of the stock market. While late week rally attempts have taken some of the sting out of those declines, many of the hottest areas from 2020 are seeing more breakdowns than breakouts. While maybe not as exciting as SPAC’s and Innovative Tech companies, I’m paying attention to what’s going on in the Financials sector. The sector made new highs this week (as did Materials and Industrials), and its new high list expanded as well. The 75% of stocks in the sector making new 52-week highs is the highest in the decade’s worth of data we have available. Maybe I’m old-school, but leadership and broad support from Financials is not usually evidence of an overall market that is on the cusp of trouble.
