This S&P 500 Rally Does Not Have Good Legs

| About: SPDR S&P (SPY)

Yes, the S&P 500 is in rally mode - new highs and all that, but it is not a comfortable rally. Something is definitely not right. There are several other market indexes that provide indications suggesting the S&P 500 rally does not have good legs.

In a stock rally, you might expect these things to happen, but they are not:

  • Small-cap stocks tend to lead the large-cap stocks.
  • Consumer cyclical stocks tend to lead the consumer staples stocks.
  • High volatility stocks tend to lead the low volatility stocks.
  • Growth stocks tend to lead the value stocks.
  • The Broad index tends to lead the high yield index.

Instead of more aggressive stocks leading this rally, we have more defensive stocks leading. It is a bit hard to imagine a rally going on long and far on the back of defensive stocks. It could happen, I suppose, but that's not the way it is usually done; and that is a reasonable basis for caution.

So here is the year-to-date rally. It is up nicely so far in this percentage performance chart.

But, here are the non-confirming charts we listed above. Each is a ratio of the performance of one index to the other. To confirm the rally, you would expect the charts to be trending up. A down trending chart is a negative divergence that is some cause for caution. These are all trending down or the uptrend has recently been broken.

Russell 2000 Small-Cap / S&P 500 Large-cap

S&P 500 Consumer Cyclicals / S&P 500 Consumer Staples

S&P 500 High Volatility (Beta) / S&P 500 Low Volatility

S&P 500 Growth Stocks / S&P 500 Value Stocks

S&P 1500 Index / S&P 1500 High Yield Dividend Aristocrats

There is also no confirmation from key countries such as Germany (NYSEARCA:EWG), China (NYSEARCA:GXC) and Brazil (NYSEARCA:EWZ). Japan (NYSEARCA:EWJ) is rallying, but only on enthusiasm for an all-in/last-ditch efforts at stimulation.

We would feel a lot more confident in this S&P 500 rally if the small-cap stocks, growth stocks, high-volatility stocks and cyclical stocks were in the lead, but they are not.


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