A month ago, I wrote an article for Barchart titled "Stock Market: 5 Reasons to be Bullish on Stocks." I commented, "Is this the end of the bear market in equities? Will we go to all-time highs from here? Could this price rally fade, and we begin another long duration of sideways trading? Currently, the answers to these questions would be pure speculation, and nobody knows precisely the outcome of these questions until they happen."
How quickly the market sentiment has shifted back to bearish. As traders/investors, we must be aware of sentiment shifts and not let our emotions convince us that price can only go one way.
Since publishing the article, there have been four new situations resulting in this shift to a more bearish market posture:
- Insufficient broad market participation
- Percentage of S&P 500 stocks over their 50-day moving average
- Crude oil failed to launch
- The S&P 500 has been in an extensive trading range for approximately one year
Insufficient broad market participation
From the March lows, the SPY had rallied to a gain of 8.7% for the year. While the chart looks strong with daily gaps and higher highs and higher lows, the rally was weak internally.
The S&P 500 is a weighted index of 503 large capitalization stocks. The top 20 stocks comprise 29% of the index weight, while 483 stocks comprise the balance. However, these 20 stocks' contribution to the recent rally was 7.08% (source Bloomberg.) The lack of participation by the majority of the S&P 500 stocks resulted in an internally weak market rally.
Percentage of S&P 500 stocks over their 50-day moving average
A confirmation of the internally weak rally was studying the number of stocks in the S&P 500 trading over their 50-day moving average. Barchart publishes this study each day on its website.
A previous example of an internally weak rally was reviewing the SPY (black bars) at the high of point 1 and then again at a higher point 2. However, the stocks trading above their 50-day moving average (red line) showed a lower high at point 2 than at point 1, illustrating that the new SPY price high was due to fewer stocks participating.
The recent divergence signaling weaker market participation was at points 2 and 3, where the SPY prices were similar to recent highs. At the same time, the stocks trading over their 50-day moving average were making lower highs. The last swing high had more stocks participating than at the current high.
Crude oil failed to launch
Source: Moore Research Center, Inc. (MRCI)
Crude oil historically has a strong rally from December until May due to the demand for gasoline in the upcoming driving season. Memorial Day starts the summer driving season and generally goes until Labor Day in September. The 5,15, and 30-year patterns are consistent during this time of the year.
Viewing the crude oil futures contract for July delivery, we can see that the market has been sideways (blue rectangle) since December and showed no signs of strong gasoline demand for the upcoming season.
The gap near the beginning of April was when OPEC announced a significant production cut and crude oil could not get traction for higher prices and has since declined.
Crude oil appears to be concerned about the upcoming recession and how it will dampen demand for energy as families and corporations will have to cap spending for a while. The domestic economy will feel the pinch on consumers as they make up two-thirds of the GDP.
The S&P 500 has been in an extensive trading range for approximately one year
The recent rally that had some bullish characteristics stopped at the top of the channel. After the longest-running bull market peaked in January 2022, the S&P 500 declined into a bear market territory, immediately becoming a significant sideways market. The previous monthly SPY chart illustrates that the market has been unable to close outside the June 2022 range (excluding a short duration, but then returned immediately.) Since June 2022, the market remains range bound.
Technically, the market needs a decisive monthly close outside this channel to resume the downtrend or begin the next up leg of a new bull market, as a trader selling near the upper end of the channel and buying near the bottom has been favorable for almost a year now.
Summary
Markets are in a constant state of change. Investors/traders alike must refrain from becoming complacent in their market views. Compared to the buy and hold period experienced during the great bull market, the current market environment requires more precise analysis, and the timing of entering and exiting their positions is more crucial.
If the current environment is causing you to lose sleep, putting money in Treasury products may be beneficial. At 5% returns with protected capital and only paying taxes at the Federal level, Treasuries are currently drawing significant cash from the equity markets.
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