Uncategorized, Weekly Update

Broad Stock Indexes Are Not yet Strong Enough to Push Higher

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Published March 16, 2018


Last week we highlighted some of the sectors that were showing unusual strength in the market. We have pointed out how our favored Nasdaq 100 index (QQQ) has been leading the market. This week we will look at some of the other broad market indexes to give you a sense that this is still a market, broadly, that is digesting its low-volatility 2017 gains. Not surprisingly, volatility has returned as the market seeks its next direction, which technical analysts would presume is upward – e.g. a continuation of the trend.

First, we look at the Dow Jones Industrial Average. While the Dow is the most quirky of indexes, with its unusual price-weighted structure, it does give a sample of how large-cap companies are performing. We see the index coiling up for a break upward or downward coming out of the triangle.

Dow Jones Industrial Average Index

A similar picture is found when looking at the Industrial sector, which has the highest correlation to the broad market.

XLI - Industrial Select Sector SPDR Fund

But this picture is confined to large-cap stocks, broadly. Small-cap stocks and the broad market, shown as the Total Market Index, show a breakout of the triangle to the upside, as expected, but little follow-on movement so far. Were this index to fall back below 140, the upside breakout would be deemed to have failed. The S&P 500 looks almost identical to this chart; as does emerging markets, which typically have some additional and different factors driving performance.

Vanguard Total Stock Market ETF

The strength of the Total Stock Market when compared to the large-cap Dow Industrials comes from improvement in the small-cap index. Small-caps blasted out of the triangle to the upside, but they have stalled out at their prior highs. Technical analysts would see this as a “double top” formation where buyers were unwilling to buy at higher prices and/or sellers were anxious to sell into the rebound. Either way, the index has not yet gathered enough strength to break to new high ground.

Russell 2000 Small Cap Index

The bottom line of this survey of market indexes is that the market remains somewhat stuck as investors are not convicted enough to strongly commit new money to the market in a big way. The Nasdaq is the only index to have found enough buying enthusiasm to propel to new highs. All of the other market indexes remain below their prior highs, trading back and forth while the bulls attempt to convince the skeptics that further upside is the best path forward.

Market Update

Following the prior Friday’s strong gains on a solid monthly jobs report, stocks took a breather Monday with little movement leading to a mixed finish. The S&P 500 touched lower by -0.1%. Threats of further tariffs targeting China sent stocks lower Tuesday by -0.6%. The Nasdaq fell a bit further as President Trump squashed the possible takeover of cellphone chipmaker Qualcomm (QCOM) by Singapore-based Broadcom (AVGO) on national security concerns. An inflation report out Tuesday showed little cause for concern sending bond yields lower. Wednesday offered a repeat of Tuesday’s performance with stocks sliding further on trade war fears while interest rates ticked lower. Stocks gave up an additional -0.6%. Little news and little movement Thursday with stocks posting a largely flat day. Stocks traded flat again Friday with news of a widening investigation into Wells Fargo’s (WFC) sales practices offsetting a positive earnings report from tech darling Adobe Systems (ADBE).

A slack week in the stock market with stocks negative 4 of the 5 days and uninspired on the 5th day. The S&P 500 (SPY) slipped -1.28% for the week with the Nasdaq 100 (QQQ) down a similar -1.24%. Small-cap stocks (IWM) dipped a smaller -0.70%.

Warm wishes and until next week.