Mixed Market Signals

Last Monday, we shared our updated views on the near-term and intermediate-term outlook for the stock market.

As a reminder, a couple of weeks ago, we strongly felt that the stock market was due for a correction.

There was no way we could have expected it to start just a few days later, nor could we have anticipated the type of correction we would be seeing.

We have seen the exact reversal of what we saw in the first half of 2024.

In the first half, the overall stock market indices moved higher, but this was powered by just a few stocks.

Here is a chart showing the relationship of the S&P 500 Index (SPX) to the S&P 500 Equal Weight Index (SPW)…

If this number goes lower, it shows that the SPW is underperforming the SPX.

You can see from the chart that when we wrote our note, this relationship had plummeted. If this were a stock chart and we calculated the relative strength index, or "RSI,” it would have shown as deeply oversold.

If you are a regular reader, you know what happens when stocks become deeply oversold, but the fundamentals do not change. They bounce back!

The fundamentals of the largest companies (the "Magnificent Seven") were better than those of the other 493 stocks, but the other companies did not have bad fundamentals.

(Note – we really would focus on the "Sexy Six" as the fundamentals at Tesla, Inc. (NASDAQ: $TSLA) have been bad!)

You can see the snap back in this relationship has been fierce!

This was likely painful for many investors as they had rotated into some of those winning stocks from the first half of 2024.

Nothing is wrong with this; that was (and is) a great way to make money. Those stocks were up for a reason!

Like any asset, though, when it becomes very overbought (or oversold), it will be set up for correction.

What is interesting about this sell-off in the leading stocks and indices is the lack of follow-through on "breadth."

"Breadth" is a term we use in the stock market to refer to the number of stocks going up or down. If most of the components of an index are moving up (say, 400 of the 500 companies in the S&P 500), we would say that there was substantial "breadth" to the upward move.

The criticism of this robust 2024 BULL MARKET was that the breadth was poor. Only a few stocks were driving most of the returns.

As we said above, though, the fundamentals of the other companies and the economy were not bad.

We have seen that in recent data. The most recent inflation data (the Consumer Price Index or "CPI") came in benign, which set off this rally in the rest of the stocks. We also saw GDP data this week that came in better than expected.

We can argue about where the economy is going, but we are in a good situation right now.

Month-to-date, the SPX is down -0.5% and -3.7% from its high. The NASDAQ Composite is -2.3% month-to-date and -7% off its all-time high.

The SPW is +3.3% month-to-date and only -0.75% off its all-time high.

In the same way that one might have been critical of the follow-through on the stock market rally because the breadth did not confirm the move, you might be critical of the follow-through on this sell-off.

Some have pointed to the sell-off that happened around this time last year. The timing is similar, and that correction took several months. Is the same thing happening now?

We are not so sure.

In that sell-off, the SPW Equal Weight traded off in line with the market capitalization-weighted S&P 500 and NASDAQ. This time that is not happening.

We also saw many indices hitting new highs last week despite the sell-off.

This list includes the venerable Dow Jones Industrial Average and Dow Jones Transportation Average. It also includes the S&P Mid-Cap Index (MDY) and the S&P Small-Cap Index (SML). Finally, it includes many of the major sector ETFs, including the Financials (XLF), the Industrials (XLI), and the Healthcare (XLV).

This sell-off may feel painful for some of your stocks, but we struggle to see how it will see real follow-through when we are seeing strength in most of the stock market.

Fresh off narrowly avoiding a long stint in Moldovan jail, the legend Whitney Tilson caught up with our founder – Enrique Abeyta – on the inaugural episode of the HX Podcast. 

We discussed our respective 2024 MARKET OUTLOOKS along with some CORE VALUES that investors should think about in their portfolios.  We also discuss a special offer for Empire Financial subscribers.  Listen on your preferred platform, or watch on YouTube below.

The HX Podcast with Enrique Abeyta brings you up-to-date financial market commentary along with evergreen insights into investing, trading and building your financial future. Enrique has 30+ years experience as a professional investor having managed billions of dollar in his firms. He brings on other world class investors and special guests to discuss investing and trading in a humorous and approachable manner.