As the strongest earnings season since 2011 draws to a close, and with the S&P 500 .SPX and Nasdaq Composite .IXIC hovering near record highs, the biggest concern for some market analysts is, well, the lack of concern.
The largest daily move on the S&P 500 in almost three weeks was only 0.4 percent. The small daily moves are partly the reason for a more than 20-year closing low hit this week on the CBOE Volatility index .VIX, a measure of investor anxiety.
“Most of what you’ll find that is outright negative will have to do with sentiment,” said Marc Pado, president at DowBull.com in San Francisco.
“People worried about the market on a technical basis are worried because there is too much complacency or optimism, but not on an indication that there is some kind of top.”
The S&P 500 posted record closing highs twice this week, but both were lower than the intraday high set March 1, just below 2,401. The intraday record high set Tuesday, near 2,404, doesn’t signal a breakout from the resistance level set some 11 weeks ago.
Precisely because of the sideways move, momentum has not mirrored what was seen in early March. The 14-day momentum measure of the S&P peaked this year on March 1. On Friday it closed at its weakest level in nearly three weeks.
“The bigger risk now (to the stock market) would be overbought conditions, even more overseas than in the U.S.,” said Katie Stockton, chief technical strategist at BTIG in New York.
“If momentum doesn’t stay strong enough, which I think it will, that would be a risk to the market. It’s a matter of momentum remaining strong enough.”
The Nasdaq Composite, which closed Friday almost 4 percent above its March 1 close and set intraday and closing records this week, is showing a particularly damning pattern in terms of breadth.
The 50-day average of advancing names on Nasdaq peaked this year in mid-January and is in a clear trend lower. It hit its lowest level this year on May 5, and the spread with the 50-day average of decliners has been in and out of negative territory since early March.
Waning breadth suggests the market advances on less than solid ground as fewer and fewer stocks participate to the upside.
On the S&P 500 the 50-day advancers average is at its lowest level since the Nov. 8 U.S. presidential election. However, with the index trading basically sideways since the March record, the signal can be misleading.
“In every one of the (previous) legs higher we saw internal breadth indicators confirming the new high. We haven’t seen that over the last week but the high was marginal only,” said Paul Hickey, co-founder of research firm Bespoke Investment Group in Harrison, New York, who remains with a positive view of the market.
“We see this as the continuation of a consolidation period the markets have been in since March 1.”
The case is even darker for the 30-component Dow industrials, where the 50-day average of advancers is also near the lowest level since November. Apple Inc (AAPL.O) alone is responsible for 25 percent of the Dow’s year-to-date advance, even if the index is not market-cap weighted.
There’s more bad news for Dow followers. The Dow Transport Average .DJT, which peaked with the industrials on March 1, is more than 6 percent below its high, while the industrials are just 1 percent below their record.
A record on the industrials without the confirmation of the transports would be another bad omen for stocks. Timing can be blunt, but there was divergence present between these two averages at major tops in 2000, 2007 and 2015.
Frontpage September 4, 2018