The U.S. stock market is holding its ground. But is it really? Upon closer inspection, we quickly see that today's stock market is on shakier footing at current levels than the headline index price might suggest.
The Solid But Volatile Week That Was
It has certainly been an eventful week. After the startling awake from a long summer's slumber, the S&P 500 Index (NYSEARCA:SPY) dropped by nearly -2.5% on Friday, raising concerns that a more sustained stock market move to the downside was about to get underway. But the trading week since has actually been fairly solid. Stocks quickly found their footing on Monday and rebounded strongly to the upside. And although the several trading days since have been highly volatile, the net result has been a modest percentage gain for the week.
Not Out Of The Woods
Although the stock market managed to muster a choppy rally over the past week, the bears still remain in control. By dropping hard on Friday, the S&P 500 Index surrendered to the downside the nine-week sideways trading range that had been in place since the post "Brexit" rally propelled U.S. large cap stocks to new all-time highs.
On Monday, stocks made an impressive run at attempting to reclaim this trading range, only to get sent swiftly back to the downside on Tuesday. And they have not come close to re-entering this channel in the days since.
As a result, stocks appear to have entered a new trading range between 2120 and 2150 on the S&P 500 Index. This still isn't too shabby considering that the previous all-time high was 2134 on the Index just over two months ago before breaking out.
No worries, right? Not so fast.
A Troubling Lack Of Breadth
While the S&P 500 Index has found a new trading range, it has not done so because of a broad range of stocks standing their ground. To the contrary, it has been a very limited group of select stocks that have been carrying the weight for the rest of the market.
For example, only 74 companies in the S&P 500, or less than 15% of the names in the Index, have posted positive returns over the past five trading days through the end of trading on Thursday. This is despite the fact that the overall index has largely been holding its ground.
Another sign of the limited breadth of the market in recent days is reflected in the percentage of NYSE stocks that are currently trading above their 50-day moving average, which plunged from over 70% just last Wednesday to 44% on Monday. And although the broader market as measured by the S&P 500 has since found its footing amid volatility in the past week, the percentage of stocks above their 50-day moving average has continued to fall to as low as 32% in the days since.
Going one step deeper into the index, we see that one stock, in particular, has been carrying much of the weight of the market world on its shoulders. This company is Apple (NASDAQ:AAPL), which is the largest company by market cap in the S&P 500 at 3.4% of the entire Index. While many stocks continued to move lower in the days following last Friday's pullback, Apple has since soared by more than 11% to the upside thanks to initial iPhone 7 sales that appeared strong.
Still Unsteady Footing For The Days Ahead
While it is fantastic that a small group of stocks led by tech giant Apple has managed to hold up the market during what has been a particularly challenging and volatile stretch over the past week, such underlying conditions are not encouraging for the trading days ahead. For it is typically an ominous sign when a small group of high octane stocks is carrying the weight for the rest of the market that is otherwise drifting to the downside, for often the burden on these few leaders becomes too much as the positive buying pressure is eventually exhausted.
Perhaps the rest of the market will also find its footing and begin making its own move back to the upside. Absolutely nothing should be ruled out in today's stimulus fueled markets. But until more stocks get back in the game, the pressure on stocks remains to the downside in the coming trading days.
Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long selected individual stocks. I also hold a meaningful allocation to cash at the present time.