I hate to sound like a party pooper. After all, we had the best day of the year Tuesday. The Nasdaq touched levels last seen in November 2000. The Dow also closed solidly above 13,000. Finally, the S&P 500 sliced through its prior resistance levels at 1,370, making the March 6 selloff of distant memory.
Yet, if you look at the internals of the market, the current rally is less robust than it appears.
There are five factors that that make me nervous:
- Only 72 stocks in the S&P 500 hit 52-week highs yesterday. That compares with more than 100 when the market last peaked on April 29 last year. When the market is rising, I want to see the percentage of stocks making new highs expand. That just hasn't been the case during this rally.
- Trading volumes remain distressingly low. Monday saw the lowest trading volumes on the NYSE in all of 2012. Neither the moms and pops of the market nor the large institutions seem to be participating in the current rally.
- As a consumer, I am big fan of Apple (AAPL). But I also think it's getting a bit too big for its boots, at least as far as the stock market is concerned. Apple's weighting in the S&P 500 index is now 4%. Bespoke Investments estimates that Apple has contributed at least 20 points to the S&P 500's performance since last April. Yes, that's still much less than 1% on the index. But it does underline how narrow this rally has been.
- I've seen a fair number of bull markets during my career. When markets are rocking and rolling, a rising tide lifts all boats. Yet cyclicals -- the stocks that should be outperforming in a rising market -- aren't really participating in the rally. Only two material stocks and three energy stocks in the S&P 500 hit 52-week highs yesterday.
- As I pointed out on Monday, global markets -- both developed and emerging -- are lagging the U.S. markets, when normally they are leading. I see this especially in the highly diversified portfolios that I run for my clients. On the one hand, it's terrific that the allocation to U.S. large- and small-caps are doing well. It's less great that no other global markets are trading anywhere near their 2008 levels.
None of this means that the current market rally cannot continue. But I've certainly tightened my stops on all of my short-term positions.