As Stock Market Prices Cling to All-Time Highs, Internals Deteriorate

The S&P500 dipped a very insignificant 0.15% last week, ending the week essentially unchanged from the prior week. S&P volatility inched up a bit higher, but the VIX index still closed near the very low end of its long-term range. And equity trading volumes were light—but a big part of that had to do with the MLK holiday which reduced the number of trading days last week.

In macro news, the reporting was light and mixed in terms of results. On the positive side, industrial production beat expectations. Initial jobless claims dropped to a multi-decade low. And the Philly Fed survey beat consensus estimates. On the negative side, the Empire State Manufacturing Survey missed. The housing market index also missed. And consumer prices—both headline and core—came in just as expected.

The technical picture for the S&P500 has not changed much. After reaching the present price levels early in December—on the heels of the Trump presidential election—the S&P500 has not moved much. And since the upward price movement has stalled, momentum indicators have turned bearish. The loss of upward momentum doesn’t suggest that any big fall is imminent; it does suggest that a minor pullback would be normal to see.

On the other hand, several longer-term breadth indicators are sending bigger warning signals, signals that do suggest that a larger drop should be unsurprising. While prices hover near all-time highs, the number of issues advancing minus the number declining is now negative…..not something you normally see in a healthy, rising stock market.  Also, the McClellan Oscillator has now turned negative….something that usually precedes larger drops in stock prices. Finally, the percent of stocks above the 50 and 150 day moving averages has turned down; also not good for the near-term prices.

Finally, the Fed had now openly communicated that it’s near-term policy will be to raise rates. This is therefore a tightening policy, a policy that stock markets rarely celebrate (as interest rates go up, corporate profits get reduced by higher financing costs, and consumer purchasing power also gets reduced by higher financing costs).

So while stock market prices cling to super high levels, market internals are deteriorating and interest rates are rising. This has never—-in the past—-boded well for future stock market prices.

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