Stockcharts.com regular weekly contributor Carl Swenlin of Decision Point thinks, as I do, that the recent rally of the S&P 500 has been poorly supported by market breadth.
Last night I wrote,
the strong Friday rally in the US stock markets may not be that convincing as market internals reveals of a “narrowing breadth” or declining participation of gains by key index issues. This means that the large gains posted by the S&P 500 have been mostly concentrated to a few index heavyweights.
Pardon me, I may be seen as guilty of confirmation bias (looking for views in support of my belief), but Mr. Swenlin’s post, as excerpted below, appears as somewhat a detailed validation to my claim above.
The “unhealthy rally” can be seen from Mr. Swenlin’s own constructed index "Blue Chip Top 10 Index”.
The index according to Mr. Swenlin (via stockcharts.com; bold original) is constructed
by calculating the daily change of the Index as being the daily average percent change of the securities in the Blue Chip Top 10 list. Stocks are tracked from the day after they enter the Top 10 list through the day they drop off the list.
The Top 10 Index is equally weighted, so theoretically one could only replicate the performance of the list with real money by reallocating an equal amount to each stock each day (and somehow avoid transaction fees in the process). More to the point, the Top 10 list are a good place to look for securities that will out-perform the market, but it will be impossible for you to duplicate the Index. You could also lose a ton of money if you are long these top ranked securities during an extended market decline.
Mr. Swenlin concludes:
In spite of upward movement of the SPX, the Blue Chip Top 10 Index tells us that the leadership of the market has been rotating too rapidly, which suggests confusion and weakness. By the time a stock reaches the Top 10, it loses momentum and drops right back out again. This is evidence that for a long time the internal condition of the market has been turbulent and confusing, in spite of generally rising market prices.
In contrast to my expectations, it’s even surprising to see that other stockcharts.com contributors as having an antsy outlook, because like Mr. Swenlin, they also have taken note of others signs of divergences between the performance of the US major bellwether S&P 500 and other indices (e.g. Russell 2000 vis-à-vis S&P 500: See Tom Baley).
Such murky outlook are simply consequences of distortions from political talk therapy (verbal interventionism through Pavlov’s conditioning and or Central banking signaling channel) aimed at artificially propping up of markets—mostly by surreptitiously assailing short sellers.
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