The Leadership is Bouncing Around, Uncertainty Abounds
$SPY, $JPM, $C
At 1st glance, the US stock market in Y 2016 is nothing like it was last year, when Winners kept winning and gainers were concentrated in a handful of leadership stocks.
But, now the leadership keeps bouncing around.
Since January, the S&P 500 Index’s strongest group has shifted among utilities, energy producers and technology companies, as investors swapped defensive shares for those that respond to economic growth.
At the same time, not all is well in the breadth department.
One gloomy signal that marked trading in Y 2015 has begun to reassert itself again, it is a pattern in which the benchmark index hovers near a 52-wk high, while the proportion of stocks that are similarly elevated contracts.
Such divergences, measured by comparing the S&P 500 and the number of issues trading above their 50-Day MA, have been rare since Y 1990, and are generally bad news for investors. In the 7 instances that occurred before Y 2016, all but 2 augured further losses in the next 3 months, with the S&P 500 falling a median 1.3%, according to the data.
This recent weakening in breadth is troubling. It rarely ends well for stocks, usually, the indexes follow breadth as opposed to the other way around.
Last Tuesday marked the 2nd time in the past month when the S&P 500 closed within 2.5% of a high, while fewer than 45% of its components traded above their average price over the last 50 days.
This occurred in June and July of last year, and the index dove into a 10% correction a month later as China’s currency devaluation sparked the biggest selloff in 4 years. Stocks ended the year down 0.7% for the worst performance since the 7.5 year-Bull market began on 9 March 2009.
Before Y 2015, a divergence like this had not shown up during the rally. The rising frequency highlights the vulnerability of the stock market to potential shocks, according to the data.
Coincidentally or not, the other time when 2 warning signals like this flashed within 3 months of each other, in December 1999 and February 2000, equities ended up erasing 50% their value over the next 2 years.
Thursday, US stocks fell extending their weekly decline to 1%, as anxiety over earnings and interest rates sent banks sliding a day before JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc. (NYSE:C) deliver their latest earnings reports.
On Wall Street uncertainty breeds fear.
All the things that we have been uncertain about, whether it political, monetary policy or the earnings recession, those are the same fear we have been dealing with. When we have larger participation, it always helps because there are more names that jump up the market so you’re less susceptible to potential declines.
Have a terrific weekend.