Yesterday was a great success for the large-cap US index. After falling over 30% in falls in March, stocks have risen steadily to make up for the loss from the first quarter. While new highs are historically bullish and rightly so celebrated. Yesterday’s move makes me scratch my head due to the very strange price movements in many other corners of the market.
I tweeted How many other indices closed last night when the S&P 500 hit its new high water mark? It’s not that we need to see it all move together, but it’s weird, small caps, mid caps, Dow Jones Industrials, Dow Jones Transports, semiconductors (which have been a strong leader for most of the recovery), and to have a balanced S&P 500. and the high beta factor closes on the day. Under the hood, the cumulative forward-backward lines for the small caps, mid caps and large caps went one step lower. The percentage of stocks trading above their respective 50-day moving averages for the Dow Industrials, Nasdaq 100 and S&P 500 rose. What went up with the SPX yesterday? Oddly enough (again) … volatility. Now, of course, there were some corners of the market that joined the SPX yesterday. Communication, Technology, Consumer Staples, and Consumer Disc. Were all positive too.
If we look under the hood, there are a few charts that really stand out when we hit the record high for the S&P 500. Let me take a few …
First, yesterday was the first time the index hit a new 1-year high since 2007 while fewer than half of the underlying stocks had a rising 50-day moving average. This happened quite often in ’98 and ’99, but was a condition that largely disappeared after the dot-com bubble burst.
While the index took to the fresh air, only 6.5% of the underlying stocks even hit a 6-month high. We don’t need to set a high bar for participating in a new 1 year high, but you’d expect at least 10% to hit a 6 month high, right? The chart below shows when the index hit its first new 52-week high in a month and less than 7% of stocks hit a 6-month high. We haven’t seen this low turnout since 2015 and before that in 2000 and 1993.
The recovery from the March low has not been particularly strong in small and mid-cap stocks. The strength was firmly found in mega-caps, especially the FAAMG names. But while the large-cap index broke out, strangely enough, the mid-cap and small-cap S&P indices failed at their highs the previous June. Again, not all stocks have to be trending together, but seeing such a breakdown as the SPX makes a new high is just … strange.
What does it all mean? The most important point I make with all forms of under-the-hood peek at internals is that price confirmation is key! Trend is your friend and until the price starts responding to the crazy nature of hardly any attendance yesterday, it just doesn’t matter … yet. After all, this was only a day. A day’s worth of data is insufficient to discredit the outbreak in SPX. Some yellow flags are sure to be hoisted and I will see if the outbreak continues. As long as these few names with the broad index have a higher sustain, we cannot ignore the fact that for now the market just needs to maintain the uptrend is in place.
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