A One-Direction Market? What's in Your Index?
Index construction matters. Here we use the equal weight index to understand what's happening outside of the mega-caps.
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For most of the time I have been in markets they have ebbed and flowed. For most of the time, we didn’t get one-directional markets. Oh sure, there have been periods of time where instead of going down for a correction, we have seen them go sideways, but rarely have we had a situation such as we’ve seen in the last few months.
When a handful of stocks move the major indexes, we end up with the majority of stocks doing one thing while this handful does another. That has caused the S&P to march to the beat of a different drummer than most other stocks.
I don’t tend to use the RSP, an etf to represent the equal weight S&P, but I believe it offers a good picture of what the majority of stocks have done. Even better than the small-cap chart.
We came off the October low quite strong, had a minor correction in January, rallied again, and then had a more concerted effort at a correction in April. But notice that April low did not give us a V bottom; rather we rallied, pulled back, rallied, pulled back, etc. Ebbing and flowing. To me, that is a normal market.
When I said in late June that I expected the ‘others’, or the 493, to rally come early July, this is the picture I had in mind. From a sideways period—a correction!—of six weeks we set up for a rally. Not an explosion as we saw in the small caps, but rather a standard rally.
Then we got short term overbought in mid-July, pulled back (as we should have) and now we are back to an oversold condition (short term). Yet for a few weeks I have noted that come late July/early August I expect we will be back to an intermediate-term overbought condition. That’s how markets are supposed to ebb and flow—not one move in one direction.
As we head into this final week of the month I do expect another rally in the market. I also expect that in approximately a week we should see the market back to a short term overbought condition and an intermediate term overbought condition. By midweek this week I expect we’ll see this shorter-term Oscillator lift itself back up, maybe (likely) to a lower high, to reach another short term overbought condition.
If we use the intermediate term Oscillator, which I admit I had expected to be higher by now, it ought to reach an overbought condition sometime this week. Even the Volume Indicator—which I also expected would be higher by now—has lifted a bit as it is now at 53%. It gets overbought in the mid to upper 50s. So it too ought to be there by the end of the week. Therefore I have not changed my view that we should be back to an overbought condition come early August.
Can the Fed meeting this week throw a monkey wrench into these indicators? Sure. But quite frankly it is my view that the Fed’s meetings have had less of an effect on the S&P itself than the handful of index movers have. And several of them report their earnings this week.
