Last year we spilled a decent amount of ink on these pages about the unhealthy breadth situation in U.S. stocks, with a dozen or so mega-cap stocks masking poor performance from thousands of others. This year, the pendulum has shifted a bit, with stocks like Apple (AAPL), Alphabet (GOOGL), Disney (DIS), Microsoft (MSFT), Nike (NKE) and Starbucks (SBUX) well off of their 52 week highs as the S&P 500 (SPX) is 1% from its prior all time highs. This could be a very healthy rotation. As the rally off of the February lows approaches key technical resistance it will take a broadening out of investor interest in other stocks and sectors for the SPX to establish a new range above the prior highs.
But the larger question so close to the highs is whether or not a new high needs to be respected? What do I mean by respected? It means looking for signs that those new highs are confirming a real breakout that leads to another leg in the aging bull market, the sort of leg that one would be foolish not to get on board. Oh, and whether the long national nightmare of the SPX stuck below 2134 for the last year is finally over. That sort of respect.
I refuse to respect the price action at the moment. That’s largely based on the main reason for this re-test. An incrementally dovish Federal reserve, causing the dollar and treasury yields to drop, once again causing investors to bang the T.I.N.A. drum (there is no alternative… to stocks).
The widening breadth is the result of money flowing back into energy and material stocks that were decimated last year into early this year, and they are only rallying because of the Fed’s about face on monetary policy this year. The strength is not the result of increased demand or tighter capacity, merely an easing of the dollar and of credit conditions. The dollar is only easing because the U.S. Fed increasingly fears for weak global growth. And while Fed Heads have suggested the weak May jobs data (and the revisions lower for April & March) are no cause for alarm, we may start to hear bells in the first week of July if we have a 3rd consecutive NFP miss and a continuation of the weak global manufacturing data.
An increasingly dovish Fed in mid 2016 will not be not good for U.S. stocks in my opinion. Just look at Japan (Nikkei) and Europe (Euro Stoxx – SX5E). Both regions have seen trillions of dollars of their sovereign debt sport negative yields. Both stock markets are down almost 20% from their 52 week highs.
And lastly, divergences of stocks like The Home Depot (HD) lower, with the SPX higher are just another example of fading leadership:
So yes breadth is better, but it’s now covering for fading prior leaders. It’s still a mixed bag based on money flow. A garbage rally of hundreds of previously beaten up stocks is not worthy of my respect yet.