The S&P 500 Index broke out to new all-time highs recently (see chart below). This is a bullish market event.
That being said, the advance occurred in combination with poor market breadth. Meaning that there are a large number of stocks within the index that are not advancing to new highs. That may sound counter-intuitive, but it occurs because the index is capitalization (cap)-weighted and larger-cap stocks have a greater weighting in the performance of the index.
Another index breaking out to new highs is the Nasdaq 100.
While it is bullish that those two indexes have advanced, it is doing so on poor market breadth.
Below is a chart of the S&P 500 index charted with its 50-day moving average in the upper panel. In the lower panel is a chart that indicates the percentage of stocks with that index that are above their respective 50-day moving averages.
Notice how the S&P 500 is substantially above its moving average. However, as of Friday’s market close, only 65% of the stocks within the index were above their moving averages. And that number has been on the decline since early April.
I will be watching to see if we can get an expansion in the number of stocks participating in any further market advance. If we do, that would be very bullish. If not, it would be a red flag to monitor and could forwarn of continued market choppiness and/or an increase in the odds of a market pullback or correction.
Another way to analyze market breadth is to simply look at different sectors, industry groups, and indexes to see if they are duplicating the strength seen in the S&P 500.
Below is a chart of the NYSE Composite Index and it is still consolidating near its recent highs. It would be a bullish sign if this index can break to new highs soon.
Small-Cap stocks have been consolidating since February and they also have not broken out to new highs.
Semiconductor stocks are a risk-on asset that tends to lead the market. The Semiconductor Index ETF (SOXX) has marginally broked above consolidation. If this index can hold above what is now support (April’s peak), it would be a bullish broad market signal. On the other hand, a drop below would signal caution.
The Bottom Line
The breakout of both the S&P 500 and Nasdaq 100 are bullish developments. Despite the weakness in market breadth, the trend is up.
If we see an improvement in market breadth in the coming weeks combined with breakouts in other indexes, sectors, and industry groups, that would be very bullish.
On the other hand, the more market breadth deteriorates the greater the risk of a pullback or correction in equities.
Client Account Update
It is important to calibrate the risk you take in your investment accounts based on the underlying risk in the market.
Client accounts are nearly fully allocated with an over-allocation to bonds and an under-allocation to equities. Bonds are enjoying the tailwind of near-term falling yields and they sometimes provide a good hedge against falling stock prices. If market internals improve, I will look to increase equity exposure.
If you have any questions, please feel free to send me an email.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Most data and charts are provided by www.stockcharts.com.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
All charts provided by: StockCharts.com