An attempted big-cap rally fizzled on Monday as small-cap stocks continued to underperform. Breadth was around three to five negative, but what was most notable was the increase in new 12-month lows to more than 375 stocks.
The action earlier this year was dominated by a few big-cap AI names that covered up the weakness under the surface. That is still occurring and offers a distorted view of the market. According to Jason Goepfert, no more than 60% of the stocks in the S&P 500 are trading over their 200-day simple moving averages, although the S&P 500 has been more than 5% over that threshold for months. This is the longest divergence since 1928.
The senior indexes have done a poor job of reflecting what is going on with the average stock for a very long time. One illustration is that the Russell 2000 is up just 5% from where it was five years ago. Contrast that performance with the Nasdaq 100, which has doubled during the same period.
Small-caps have been lagging again recently, but a jump in Apple (AAPL) , which is part of the Action Alerts PLUS portfolio, and a few other bigger names is helping the senior indexes show some relative strength. Will that continue, or will the Fed interest rate decision shake things up and cause more correlated action?
The biggest positive the bulls have going for them is that everyone is aware that the last two weeks of September are historically weak. In addition, we have the Fed decision, and everyone already knows there will be no rate hike, though it's likely that Fed Chairman Jerome Powell will leave open the possibility of another increase at a later date.
Crude oil is hitting its highest level since last November here on Tuesday morning, and that is going to complicate the inflation issue. There also is the problem of bond yield risk, depletion of Covid savings, resumption of student loan payments, strikes, and a decline in real wages. All those things suggest that hiking rates further may cause more problems than it will solve.
These uncertainties are likely to lead to more choppy action on Tuesday. Technical conditions are poor and there is little momentum. That makes it difficult for buyers who want to put money to work. The likelihood of increased volatility following the Fed will also push folks to the sidelines for now.
(AAPL is a holding of Action Alerts PLUS. Want to be alerted before the portfolio buys or sells these stocks? Learn more now.)
