remains in a bullish structure and has held above key support levels, a closer look reveals significant divergence beneath the surface. Market breadth has deteriorated, with the average stock performing much worse than the index itself. This disparity highlights a challenging environment, where strength in a few large-cap stocks masks broader market struggles—a theme that will be explored throughout this newsletter.
It is important to note that this potential breakdown would not necessarily signal an impending crash or a transition into a bear market. However, it would suggest increased caution, as the market’s ability to sustain its uptrend would come into question. In such a scenario, adopting a more defensive stance until conditions improve would be prudent. This underscores the importance of closely monitoring market behavior at this key juncture.
This divergence highlights a critical theme: while the S&P 500’s performance is buoyed by the strength of a smaller subset of large-cap stocks, the broader market has struggled. Poor market breadth of this kind can be a warning sign, as sustained market advances typically require broader participation across a larger number of stocks.The third chart provides a detailed technical view of the S&P 500's current position relative to its key moving averages and MACD momentum indicator.
If the index falls decisively below support, it would mark a departure from the bullish pattern of holding above key support levels seen over the past year. Such a move would suggest near-term market weakness and indicate that caution is warranted. While this wouldn’t necessarily signal a crash or the onset of a bear market, it would reflect a change in the market’s dynamic, encouraging a more defensive stance until conditions improve.
This indicator has effectively predicted three prior market pullback bottoms over the past two years, although with some variation in timing. For example, during the October 2024 pullback, the line dropped below 10%, signaling oversold conditions. While the index fell to a lower low afterward, the oscillator formed a higher low - a positive divergence that ultimately preceded a strong market recovery.
If the market bounces off support and conditions improve, I plan to increase our equity exposure to take advantage of strengthening trends. Conversely, if the market decisively breaks below support and conditions deteriorate, I will likely adopt a more defensive posture in the short term to protect against potential downside risk.
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