The Stock Market is Approaching Another Turning Point

The S&P 500 has essentially flat-lined since March but we’ve been losing breadth, meaning fewer stocks are participating in the rally, as shown in the chart below.  The black line shows the S&P 500 over the past 2 years and the green line shows the number of stocks in the S&P 500 trading above their 50 day moving average.  You can see that fewer and fewer stocks have been able to hold up as summer has progressed which tells me that the market is becoming concentrated as less stocks are buoying the whole index.  Unless we see a resurgence of broad-based buying (more stocks participating), I think we’ll see gravity pull the overall market down a bit.

S&P 500 vs % of stocks in S&P 500 trading above 50 day moving average (2 year chart courtesy of www.indexindicators.com)

We can even drill down to see the performance of various industries year-to-date, courtesy of www.finviz.com.  As you can see, Healthcare, Consumer related companies and Technology have been the biggest winners.  Namely biotech and the health insurance companies have posted the strongest gains due to some industry consolidation.  Industrials, Utilities, Conglomerates and Basic Materials have all lagged.  These industries tend to be more cyclical as they are largely tied to economic growth – a bad indication of the health of the global economy.

Year-to-Date Performance

This divergence has become worse over the past few weeks as the few companies still posting strong growth have become very concentrated in ownership.  It seems like only a handful of companies are holding up the entire market.  I’ve actually been trimming our positions in companies like Starbucks and Under Armour lately.  After investors have chased them higher by paying a premium for growth, these stocks (and many similar companies) are trading at very expensive valuations.  Usually not a wise thing to chase…

We have the very important ISM Purchasing Manager’s Index (PMI) data release for July coming out on Monday morning.  That will probably provide the indication of whether we’ll see a rotation back into some of the industrial and transportation stocks (leading to the next leg higher) or if we need another dip to reset things.  So far the US PMI has held up much better than other countries around the world (better than I expected).  We’ll see if the global slowdown is starting to affect the US, or if the US can keep the rest of the world afloat.

Have a great weekend and thanks for following!

-Nick