Remember the Broadening-Out Trade? Nobody’s Talking About It Anymore.
The equal-weight S&P is testing its 50-day moving average, small caps are sliding, and market breadth is weakening. The bullish narrative has changed fast.
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You know what I did not hear on Tuesday? No one talked about the market broadening out. No one talked about how great the equal-weight S&P has been. And no one talked about small caps. Heck, they didn’t even talk about how the market had a ‘clearing event’ in July.
That’s what three days of selling will do to the narrative. It also helps that the Russell is now down five percent from the high two weeks ago and back to where it was in late May.
And the beloved RSP? That is enjoying its first trip to the 50-day moving average line since April. It hasn’t quite tagged it yet, but this is the closest it has come. It ought to find a little bit of support here and bounce.
I do want to stop for a minute and answer a question I was asked: Why am I highlighting 50-day moving average lines so much lately? I had not realized I had been, but I looked back, and it turns out I have.
Many of the major indexes are trading in the neighborhood of where they were a few months ago. Note the IWM above, trading where it was in May. The S&P tagged the June high area on Tuesday. Fifty trading days ago was late June. That means some of these moving average lines are flattening out, some are in danger of rolling over. It has always been my view that a rising moving average line or even a flat one is easier to hop back over than a falling one.
Just look at the 50-day moving average line of the SOX and see how, first the flattening and then the rolling over acted as resistance. Glance back to April, and you will see it never really rolled over after the price fell under it. That made it easier to get back over it.
As for the indicators, the number of stocks making new lows expanded again, with Nasdaq clocking in at over 300.
Bonds were fussed over, but their move was rather subdued, and the Utes had quite a rally. The DSI for bonds did not budge and remains at 14. I continue to think there is some bottoming action going on here, but so far it’s been the wrong call.
Sticking with bonds, I have been watching HYG and JNK because they have remained pretty solid despite the move up in interest rates. But on Tuesday, there was some selling. For example, HYG has some support in this 79 area, but now it has given up almost its entire August rally.
In sum, I think we can bounce with so many indexes so close to big levels, but the indicators are all still pointing down, and sentiment, while not as exuberant as it was two weeks ago, is not showing much fear. But hey, the VIX is finally on the move. Oh, and the DSI for oil is now at 85. Gasoline is at 86.
