Last week the S&P500 rose a little bit more, rising only 0.2%, but the weekly increases are clearly not as strong as they were when the started in early October. Volume also dropped back, confirming the lack of buying interest. And volatility actually went the other way—it crept back up a bit, which contradicts the slight rise in prices for the week.
Macro news became more gloomy last week. New home sales missed very badly, as did the Dallas Fed manufacturing survey. Durable goods—headline and more importantly ex-Autos—missed expectations. Home prices, as reported by Case Shiller, also missed. PMI flash services missed. Consumer confidence crashed. the estimate for the 3rd quarter GDP growth disappointed. Pending home sales missed badly. Personal spending and personal income both missed. Consumer sentiment missed badly. For the week, only Chicago PMI and initial jobless claims beat expectations.
Perversely, as noted in several prior posts, all this bad economic news was met by the US equity markets with a positive attitude. And not because the Fed would be delaying its tightening (on the contrary, the odds of a Fed tightening in December soared last week), but because equity markets were in part expecting more easing from other global central banks—the ECB in Europe, the central bank in Japan and the central bank in China.
All that said, the momentum of the increase in US stocks is clearly slowing. Last week’s increase was the smallest of the rebound. But there’s a bigger concern that most market analysts when cheering the rebound in the overall indices fail to point out—the US equity markets have bounced on the performance of a few key “generals”. At the same time, the vast majority of the smaller less glamorous stocks, the “troops” have been sorely lagging in performance. Most have not rebounded much if at all.
How do we know this? For one, only 36% of individual stocks in the S&P500 are above their 200 day moving averages. So the vast majority of stocks are far, far away from their recent all-time highs. At the same time, the overall index has now closed in on its recent all-time high.
This is a problem. In almost all equity market crashes, in the months before the actual crash, something similar happened—markets dropped initially, only to rebound back to their prior highs…..but without the participation of most of the stocks in the index. Then, when the markets broke down the next time, losses far worse than the initial break were incurred. In other words, stocks then crashed.
This pattern is now possibly repeating itself.