S&P 500 Market Outlook (May 19): Breadth Deteriorating

In this investing research note, we will analyze key stock market indicators, consider the current trend of the S&P 500 Index (INDEXSP:.INX), and discuss emerging themes that we are watching in our investing research.

Here’s a summary of the highlights:

Breadth Deteriorating as S&P 500 Moves Toward Support – The S&P 500 has been unable to sustain the tentative breakout above 2400. While new highs are a mark of strength, in this case the move came as trends at the individual stock level have been deteriorating. This may mean the S&P 500 may be in for further consolidation prior to a sustained move higher.

NASDAQ Overextended, While Stocks Overall Lack Leadership – The NASDAQ Composite (INDEXNASDAQ:.IXIC) has been the clear leader among U.S. indexes this year, but its gains have come with narrowing participation, suggesting it too has been ripe for a pullback. More broadly, the typical leadership groups have not joined the indexes in making new highs, suggesting rally attempts in the near term could falter.

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Copper Continues to Consolidate but Bond Yields Break Support – Looking beyond stocks, we are watching both copper prices and bond yields closely. Copper continues to consolidate following a break of the long-term down-trend, while the spate of weaker-than-expected data and increased political uncertainty has increased demand for bonds and pushed yields lower.

Equity Market Sentiment Indicators

S&P 500 Index

Political uncertainty this week allowed stocks to wake from their slumber and experience some historically normal volatility. Whether it is a one-off event or the return to a more normal environment remains to be seen. Following a tentative break above resistance near 2400, the S&P 500 has broken below 2380 (which has provided support for the past month) and could be on its way toward support near 2330. Looking farther out, the S&P 500 may be overdue for a 5% correction (the last such decline was over 200 days ago, the longest stretch since 1996). That would bring the trend-line off of last year’s lows and also the 200-day average (near 2260) into play.

While the S&P 500 has been in consolidation mode, breadth has been deteriorating, and this may mean the index needs to work lower prior to seeing a sustained rally. We had hoped to see the percentage of stocks above their 200-day averages remain elevated while the percentage of those above their 50-day averages got washed out. The opposite has occurred. Longer-term trends have deteriorated without near-term trends getting oversold. At this point we need to see sustained improvement in these trends (even if from slightly lower levels) to gain confidence that the S&P 500 has sufficient underlying support to sustain a rally.

Nasdaq

The tensions between the index and the underlying stocks that are present for the S&P 500 are even more pronounced for the NASDAQ Composite. The NASDAQ has been a leader this year, and while other indexes have moved sideways, it has rallied to new all-time highs with improving momentum. Breadth, however, has not kept pace. The percentage of NASDAQ stocks trading above their 50-day averages has deteriorated since the beginning of the year and the new high list has narrowed.

 

 

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