Weekly Stock Market Outlook & Technical Review
Here’s a look at some key stock market indicators and emerging themes that we are watching in our latest “Weekly Stock Market Outlook”:
Small-Cap Leadership Trends Strengthening – On an absolute basis, the popular stock market averages have made little headway in recent weeks. On a relative basis, however, small-caps stocks (i.e. Russell 2000 – INDEXRUSSELL:RUT) continue to trend higher versus large-caps (i.e. S&P 500 Index – INDEXSP:.INX).
This can be seen when comparing indexes the Russell 2000 vs. Russell 1000, or S&P 600 vs. S&P 500) and is also evident in the industry group relative strength rankings. Small-cap groups are seeing increased relative strength while large-cap groups are waning.
Excessive Optimism a Headwind for Stocks – The weight of investor sentiment data now points to excessive optimism. The caution and skepticism that was present in June has largely been replaced by increased bullishness and exposure to equities.
Looks Like Rally Has Lost a Step – The popular stock market averages drifted to new 52-week highs last week. But the new highs list among individual stocks/issues has been narrowing for over the month. Likewise, sector-level trends have stopped deteriorating, but have yet to show sustained evidence of getting back in gear.
Stock Market Indicators – Indices & Sectors (click to enlarge)
S&P 500 Index
The S&P 500 continues to trade in a narrow band. Today could represent the 17th straight day of a daily range of less than 0.75% for the index, the longest such streak in 40 years (h/t @RyanDetrick). This compounds the momentum problem for the index – new price highs have not been confirmed by a higher high in momentum. Now momentum is moving toward trend-line support. Given the widespread optimism that is being seen in the sentiment surveys (more on that in a moment), this raises the risk of a meaningful pullback in September. The first meaningful level of support could be 2130, and a break of that could lead to a test of the rising trend line near 2080.
Small Caps Performance
Small-caps have continued to gain relative strength, both at the index level (represented here by the ratio between the S&P 600 and the S&P 500) and at the industry group level. Small-cap industry groups are increasingly among the Relative Strength leadership groups, while large-cap groups have fallen in the rankings.
Investor Sentiment
The Investors Intelligence survey of advisory services has shown increased optimism in recent weeks. Bulls, which were as low as 35% in June, have surged to 57%, the highest reading since May 2015. The bearish contingent has only fallen slightly – from 25% in June to 20% this week.
Sentiment among individual investors is more mixed. This week’s AAII survey shows an equal split between bulls and bears (both just below 30%). It may be that the views expressed in this survey have more to do with the state of the country overall and not necessarily just stocks.
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