Thursday’s trading action was marked by a theme I discussed in the previous Daily Market Outlook — a defiant U.S. dollar.
The European Central Bank’s announcement that it will keep its key interest rate unchanged led to some wild swings in the EUR/USD currency pair. An initial selling spree in the euro was quickly stopped and the dollar began to rally.
While the dollar still has more to prove if this is indeed an intermediate-term bottoming phase, its defiant move higher, particularly if it accelerates, could act as a serious headwind for stocks.
Over the past few days, I have raised several warning flags about the sustainability of stocks’ big rally off the January/February lows. Today, I’d like to try to give you further perspective on where we’re at.
On the first chart, I plotted the SPDR S&P 500 ETF Trust (SPY) versus the ratio of the Guggenheim S&P 500 Equal Weight ETF (RSP) and SPY (blue line).
The RSP/SPY ratio has clearly been lagging SPY since early March. This tells us the rally over the past few weeks has been led by a few heavily weighted stocks, which speaks to deteriorating market breadth.
This does not mean the market is going to come crashing down at any moment, but in my 20 years in this business, this type of deteriorating market breadth has rarely — if ever — signaled a good time to chase stocks higher.
On the next chart, I plotted SPY along with Utilities SPDR (ETF) (XLU) in red and the Consumer Staples Select Sect. SPDR (ETF) (XLP) in orange.
Over the past two trading sessions, XLU and XLP have fallen sharply, catching investors by surprise. These two sectors, which combined make up about 13% of the S&P 500, have helped keep a lid on the market in the past couple of days.
Finally, looking at SPY itself, we see Thursday’s price action resulted in a nice bearish reversal, i.e., selling confirmation after Wednesday’s buying exhaustion.
While SPY remains above its 8-day (blue) and 21-day (yellow) simple moving averages, this is yet another warning flag for bulls that the getting on the long side isn’t as good as it has been and that a corrective wave may be near.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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As of this writing, Serge did not hold a position in any of the aforementioned securities.
