August 2023
For the last couple of months, the S&P 500 has been mostly range bound between 4,000 and 4,200. While the index did manage to briefly break through overhead resistance at 4,200, the index has not held that level. Market breadth has been notably weak, with only about 40% of index constituents trading above their 200-day moving average.
While the S&P Index is up over 8% YTD, the equal weight index is down 1.4%. What does that tell us? It tells us that the market has a case of very bad breadth. Concentration has increased and the five largest companies (Apple, Microsoft, Nvidia, Meta and Amazon) now make up nearly a quarter of the S&P 500 Index. This year’s gains have been primarily driven by the mega-cap stocks in the information technology, communication services, and consumer discretionary sectors. Is this bad breadth a problem for stocks looking forward?
This narrow market leadership is considered by many investors as a missing piece of the recovery puzzle. As I said earlier, less than half of the stocks comprising the S&P 500 are trading above their 200 day-moving average (dma), while only around a quarter are outperforming the index year to date (see chart below). Furthermore, these percentages have declined over the last several weeks, forming a bearish divergence between price and market breadth.
In a typical bull market or even a developing one, widespread participation provides confirmation of the uptrend’s strength and sustainability. When participation in the advance is limited – as is the case for 2023 thus far – vulnerabilities emerge as the weight of the market’s advance falls on the shoulders of a limited number of stocks. The lack of broad-based buying across equity markets also points to potentially limited investment opportunities and a lack of conviction among investors. Both of these attributes are likely impacting breadth this year as higher yields in the fixed income market raise the bar for capital crossing back over into equities.
"Neither FEAR nor FOMO (fear of missing out) are good investing strategies."
We never know how the market will respond until it does, but there is reason to still be patient here. Just as fear is not a good investing strategy, neither is FOMO (fear of missing out). Recession is still on the table and even likely later this year, in my opinion. The S&P 500 has had much difficulty in breaking through the 4,200 resistance level. It looks like the debt ceiling debacle is almost behind us (until next time at least), though the additional resulting debt could put some upward pressure on short-term interest rates in the near term. Though the regional bank stress appears contained for now, the commercial real estate challenges aren’t going away anytime soon. And don’t break out your Fed pause champagne just yet because Friday’s still-stubbornly-high inflation data keeps a Fed rate hike next month on the table. Not to mention, ever tightening credit.
If you have any questions or concerns, please reach out to us. The entire RCS team stands ready to help. We love what we do and each day we recommit ourselves to serving you!
(WARNING: Shameless plug follows)
On another note unrelated to the markets, my daughter LG, recently sat for an interview. The links below will take you to the podcast. Many ask me why she does what she does by way of fighting… she can answer that question better than I. Give it a listen. I think you’ll enjoy it.
Blessings!
Jim
(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.)
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