As we move further into the year, stock market indexes continue to show impressive gains, reflecting a robust uptrend that might suggest a broadly positive market sentiment.
Stock Market Narrow Market Breadth
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Stock Market Internals Are Deteriorating Rapidly
The S&P 500 index reached an all-time high this week; however, market internals continue to flash warning signs. A handful of large-cap semiconductor stocks appear to be propping up the market, but they may be the last chips to fall.
Market in Confirmed Uptrend, but Internals Flash a Warning Sign
During the past month, the S&P 500 Index advanced to all-time highs and is in a confirmed uptrend.
However, market breadth is increasingly suggesting internal market weakness.
Is The Pullback Over?
Heading into April, the prevailing view was that the Fed would lower interest rates three times before year’s end. Typically, a strong economy and lower interest rates support a bullish stock market. However, April’s inflation data came in higher than expected, causing interest rates to rise and prompting investors to adjust their expectations. Consequently, the S&P 500 dropped by a little over 4%.
Market Technicals Diverge From Market Consensus
When I wrote last month’s newsletter the S&P 500 was nearing the upper end of its uptrending channel, but was not there yet. Over the past month, major market indexes continued to run higher and the S&P 500 is now at the top of its uptrending channel (see chart below). This is an area in which I would expect some market weakness in the near term. Not a change in trend, just some type of short-term pullback.
Cross Currents
When I wrote last month’s newsletter the S&P 500 was nearing the upper end of its uptrending channel, but was not there yet. Over the past month, major market indexes continued to run higher and the S&P 500 is now at the top of its uptrending channel (see chart below). This is an area in which I would expect some market weakness in the near term. Not a change in trend, just some type of short-term pullback.
Strong Price Action
The stock market is in a strong bullish environment.
Short-term the market is extended and nearing the upper end of its uptrending channel which is an area where it has pulled back in the past.
Market breadth has deteriorated over the past month which is an additional factor that suggests we could see a minor short-term correction in stocks in the near term.
Breadth Thrust
No market indicator is infallible. Because of this, I use a weight-of-the-evidence approach to formulating my market thesis.
Based on this approach, the market appears to be longer-term bullish; however, major market indexes are overbought and at major resistance.
Bullish Breakout
After reaching overbought levels and pulling back from August through October (declining orange channel in the chart below), the market has decisively broken out to the upside. The strength of the move suggests that the path of least resistance over the coming weeks and months is higher.
Inflection Point
Stock Market As mentioned in our August 7th newsletter, Stock Market Weakness Likely, the market reached overbought levels and was due for a pullback. Below is the same chart that I presented in that update. I stated that the market was advancing within an...