Two the Point — What Lies Beneath? Market Leadership, Part ll

Given the potential headwinds – banking industry woes, the debt ceiling debate, and a mixed bag of economic data – the S&P 500 has been quite resilient. Since March 13, stocks are up nearly 10%. That said, since our first piece on market leadership was published on April 29, the S&P 500 has been unable to make additional progress. In that piece, we highlighted that although the market had rallied, the leadership profile was decidedly defensive – consumer staples outperforming consumer discretionary, gold outperforming copper, and large cap outperforming small cap are a few examples. 

This week, we will highlight more recent stock market behavior and discuss how that informs our near-term view. Last week Chris Verrone, Head of Technical Analysis at Strategas Research Partners, detailed some interesting trends that further underscore the tentative nature of the current rally.

  1. More lows than highs in tech: Last Tuesday marked the 50th consecutive trading day with more new lows than new highs on the Nasdaq. As the tech sector continues to lead us higher, fewer stocks are contributing to that strength. Further, less than 50% of tech sector stocks are above their 200-day moving average.
  2. Watch credit markets: High-yield credit has started to diverge from stocks (high-yield credit prices falling with stocks rising). Credit and equities rarely diverge for extended periods.
  3. A few large stocks doing the heavy lifting: As seen below, the market capitalization-weighted S&P 500 (where the largest four stocks account for about 20% of the index) has pressed higher while the equal-weighted S&P 500 index is again trending lower. Another example of the market narrowing.

We believe this data provides further evidence of the defensive nature of the recent strength in stocks.  We would like to see some of these trends reverse before being more confident in the sustainability of stock prices at current levels. 


(As of date, 5/17/23)

Source: FactSet; Bryn Mawr Capital Management


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