The S&P 500 and the Dow Industrials have recently been among the strongest of the major indexes, with the Transports, Small-Cap, and Utilities now falling behind the performance of the senior indexes anywhere between 3% and 10%. This lack of confirmation by the broader-based and smaller-cap indexes is a sign of how fractured the market performance has been, with the largest of the large stocks holding up the indexes, while most of the rest of the market continues to trade in a very mixed fashion.
The Dow Industrials and S&P 500 may be close to new highs, but it certainly has not been an exciting move up, more like a crawl. Market internals and much of the rest of the markets continue to act in a very mixed way that does not exhibit the usual kind of support that drives markets higher. In our opinion, these markets are getting tired this late into the annual seasonality timeframe of October through May when stocks are usually in favor. The annual “sell in May and go away” seasonal indicator is right around the corner.
Volume is low and without the participation of a larger part of the rest of the market, any such move to new highs will be suspect. This has caused an overall attitude of complacency in a market that has been mostly rewarding to those who are willing to own the highest volatility and most risky of the large-cap growth stocks, while most of the rest of the stocks in the market struggle to find a bull trend. This is also supported by the extremely low reading in the volatility Index (VIX). We think that the situation will clear up over the next few weeks with either a surge to new highs by most of the indexes, or the start of a correction. At this time, we would lean more towards the possibility of a summer correction rather than a meaningful move to the upside from here.
TRADING UPDATE: Remember, diminished or lack of global growth will eventually override generally bullish US fundamentals. This may contribute to increased headline volatility that is difficult (if not impossible) to anticipate as to when it may occur with either fundamental or technical analysis. We have stopped buying equities at this time with no compelling reason to be fully invested. This market is being forced higher and we will move in unison with the rally. However, we remain cautious and will look for anything that could derail the current trend. We have begun a small counter trend downside hedge in the portfolios and will stand ready to increase the exposure if we see the markets weaken. Until then, we continue to remain diligent in our research and will continually monitor the markets and report back as data becomes available.