Not since the dot-com bubble have stocks thrown up this concerning metric For some time now it has been a feature of the U.S. stock market that a seemingly relatively serene S&P 500, currently sitting less than 1% from record highs, has contained some frantic and disturbing action beneath the surface. And the worrying signals keep coming, according to Jonathan Krinsky, technical analyst at BTIG. In a note published over the weekend titled “Something’s gotta give,” he argues that it’s not just equity market characteristics that are “unsustainable” but there are concerning developments in credit, too.
The main issue he addresses is the lack of market breadth. In simple terms it means that the equity market’s rally tends to be driven by a narrow group of stocks. Recently, for example, there has been a resurgence of many of the Magnificent 7 cohort of big tech.
Yes, it’s a trend that’s been concerning more bearish investors for a few years, but now Krinsky has spotted a bad breadth signal that has delivered metrics not seen in a quarter of a century. The S&P 500 at the end of last week contained only 47.8% of its components above their 200-day moving average. At the same time the index closed very close to a 12-month peak.
Krinsky calculates that there’s been only 25 other days “that had less than 50% of S&P 500 stocks above their 200-DMA and the SPX itself was closer to a 52-week.” All of those took place between 1998-2000, in the run-up to the dot-com crescendo. Taking the breadth issue further, Krinsky notes that there have just been nine consecutive days when S&P 500 constituent 52-week lows were greater than 52-week highs, and the index was within 2% of its recent peak. That’s only happened three times since 1990, he says: in December 1999; January 2000; and now.
Krinsky provides a reminder of what happened in 2000. From July 1999 through February 2000, the equal-weighted S&P 500 index , which removes the outsized heft of market-leading big tech stocks, fell 16% while the market-cap weighted S&P 500 proper added 8%. But they then reversed, with the S&P 500 falling 17% into late December that year, while the equal-weighted S&P 500 rose 20% as investors moved away from the erstwhile high-flying technology stocks.
So far the broad market has proved stoic. Krinsky notes that it’s now been 213 trading days since the New York Stock Exchange registered an 80% or more downside volume day — likely because investors keep shifting to and from sectors. The average calendar year contains 21 such days, and there’s never been a year with fewer than five, he adds.
Extract — continue reading at the source.
