Questions Arise About Broad Stock Participation
The market’s tight consolidation just above the upper end of the previous range continued for yet another day on Thursday. Markets initially opened lower after some mixed global manufacturing readings showed acceleration in Japan, a slowing rate of positive growth in the Eurozone, and a slight disappointment out of China. Domestic economic data was once again weaker than anticipated as the Chicago Fed National Activity Index failed to recover and move into positive territory. Weekly jobless claims did show continued strength in the labor markets. Shortly after the open buyers emerged to support prices and bid stocks slightly higher on the day. The S&P 500 ultimately closed with a small gain of 0.23% to finish trading at 2130.82. Trading volume was extremely light on the day due to the upcoming Memorial Day weekend. The advance/decline margin was roughly flat for the second consecutive trading day. New highs and new lows were relatively unchanged from the prior session. While other technical readings were roughly the same as prior sessions, individual sector performance was broadly positive. Only the financial sector closed lower in Thursday’s trading. Meanwhile shares of energy and industrial stocks managed to move higher and outperform the broad markets. Commodities were mostly positive throughout the course of trading which helped influence the energy sector’s outperformance yesterday. Bonds moved higher across the board as interest rates stabilized and moved lower after their recent short term surge. The yield on the benchmark 10 year U.S. Treasury closed at 2.19% yesterday.
While the S&P 500 has closed at an all-time high three times in the past week, there are some questionable signals beneath the surface which suggest that we are not seeing broad participation amongst individual stocks as the S&P 500 stretches to new highs. First, the number of individual stocks reaching new 52 week highs simultaneously with the S&P 500 hitting a new all-time high has been disappointing. While we have seen a modest expansion in new 52 week highs over the course of the past week, this number is well below the levels that were evident last year when the S&P would register a new high. Secondly, at the moment only 62% of stocks in the S&P 500 are trading above their respective 50 day moving average. The 50 day moving average measures the average price of a stock over the previous 50 days. This is a relatively weak reading given that the S&P 500 is at all-time highs. One could argue that these two measures suggest waning broad based participation of stocks. This does certainly speak to the S&P 500’s inability to power higher in recent weeks as some individual stocks have struggled to move higher. The fact that there are fewer stocks participating in upside movements has the potential to be a warning sign to the overall market if we do see deterioration in the index’s performance. While no one indicator is a precursor to future market performance, this is a negative divergence that should be watched extremely closely. It will have to correct itself in the future for rallies to have staying power and for the market to make additional headway to the upside and should be considered when adding to new long positions.
This morning markets are indicated to open flat ahead of Janet Yellen’s 1pm speech on the economy. In overnight news, China announced it would expand its capital account liberalization. This gives Chinese investors the ability to purchase stakes in offshore investments and vice versa. This is certainly an attempt to stabilize China’s current account fund flows which have indicated capital is fleeing the country at a rapid rate. Asian markets put in a strong performance in the overnight session in response to this news. In Europe, first quarter GDP results for Germany showed that growth slowed to a 1.1% annualized rate from the previous quarter’s 1.6% growth rate. Both government spending and capital investment accelerated which does bode well for future developments. Other developments in Europe showed continued progress of negotiations between Greece and the European Union. It remains to be seen what the ultimate outcome for Greece will be. However, despite all of the antics and negotiations it appears that Greece and the European Union will find a way to avoid a Greek default. Domestic economic data released this morning showed that the consumer price index moderated in the month of April. The CPI was reportedly rose 0.10% in April after increasing 0.20% in March. On a year over year basis the CPI has declined by -0.20%. Investors should be closely watching inflation trends as oil prices have moderated and halted the downside momentum in inflationary pressure. With the Fed ready and willing to raise interest rates in the future any hint of inflation or economic strength could influence their decision to hike. This will likely be a point of conversation when Yellen speaks at 1pm which will ultimately drive today’s trading.