Investors are left to marvel if the stock market rally is resting or rolling over
This month has become a sideways “slowvember” slide in recent weeks, with stocks remarkably steady near record highs, as investors are again left to marvel if the tape is resting or rolling over.
The August lows in both the S&P 500 and 10-year Treasury yields continue to look like consequential bottoms, reflecting a late-summer exceed to have been premature and left most investors defensive and not ready for a quick rebound.
Until now the relief rally that ran to a surge in bond yields and cyclical stocks has fallen back a bit, and short-term gauges of investor sentiment became stretched, holding the indexes in a narrow level in recent weeks. Restrained, but so far resilient: Dips have been shallow, with the index halting declines just below the 3,100 level. For the past two weeks, the S&P has fluctuated in about a 1% range between 3,090 and 3,122.
The action likes what happened for a few weeks in September, when the S&P cuddled the 3,000 level after a 6%, one-month rebound. It eventually made way to a choppy 3% setback before a slingshot move higher in November, largely tracking reports of trade-deal progress or its deficiency.
S&P 500, 1-year:
Short-term trader sentiment has become a bit too bullish, arguably, with scarce demand for downside put protection and the spread between bulls and bears in the weekly Investors Intelligence poll of advisory services reaching the upper end of its multi-year range — though nowhere near the dizzy heights of January 2018.
The mount to new highs was sharp and persistent enough to build the major indexes overbought means they had stretched far above a longer-term trend, a sign both of impressive momentum and vulnerable to a quick setback.
This Bespoke Investment Group sketch the S&P 500 relative to its 50-day average shows the tape coming off the boil without much damage at all in terms of broad-market downside yet.
Source: Bespoke Investment Group
Canaccord Genuity strategist Tony Dwyer, who remains bullish on stocks heading into 2020, nonetheless has been seeing for a downside jolt of somewhere less than 5% to reset sentiment and refresh buying appetites through lower costs.
“O'er the past two weeks, the market has corrected internally, and it may finally start reading up in the major market indices,” Dwyer notes.
Some corrections remain stealthy and subsurface, of form, giving up the marquee indexes packed with a mixture of secular-growth and defensive lines as well as industrials and Financials.
Leaders have slowed
Some leading engines of the risk-on run have slowed indeed. Semiconductor stocks went in vertical and have reset lower by a few percent. The Apple shares have recessed from an all-time high in recent days. Transportation and small-cap indexes, suffered of the global-trade slowdown, sped higher off the late-summer lows but never quite pushed above the top of their longstanding trading ranges.
And 10-year Treasury yields are down a quick 5% in two weeks, to roughly 1.75%, as bond investors calibrate leading clues of industrial revival against still-sluggish manufacturing and GDP-tracking information. And risk spreads on junk bonds have stopped improving this month, now sitting at wider levels than they were two months ago when the S&P 500 was about 3% lower.
There has likewise been an undertow of selling below the index surface that has dragged broad-market breadth lower, with an uptick in the number of stocks making new 52-week lows, albeit also with plenty of fresh highs.
Willie Delwiche, strategist at R.W. Baird, points out the number of net new highs has retreated, yet without hurting the S&P 500.
All this comes to a fatigued, uncertain market, merely one that has not yet seen heavy, determined selling even with the S&P 500 up 23% this year.
Nothing about this natural process has cost the bulls the benefit of the doubt — nor would a quick retirement. Any pullback of up to some 4% would do naught to stir up the idea that the index has broken higher into a new approach.
The base of the rally since August remains plausible: that economic and corporate earnings growth is trying, the Fed has eased deftly off the brake with three rate cuts, credit conditions are okay, the Treasury yield curve is back to a normal slope, seasonal forces are favorable and big investors underinvested and prone to chase stocks higher.
This stays on the prevailing setup, as the market’s muted action prompts questions of whether this is a mere stutter-step along the march higher, or the beginning of a retrenchment that rekindles investor anxiety. Walls of worry are a respectable thing for bull markets to go up — even if they set about as hazardous stumbling blocks.