Over the past few weeks the internal health of the stock market has markedly deteriorated, giving way to a number of warning flags that could presage unfavourable performance in the short to medium-term.’s rally. Since mid-May, all of my short-term breadth indicators have trended lower while the S&P 500 continues to march higher. Most notably, only 34% of the S&P 500’s constituents are trading above their respective 20-day moving averages while the index trades at all-time highs.
While this is also true of market internals as a whole, the negative divergences of the constituents within my market internals index are not unanimous, unlike that of the pro-cyclical index. Credit spreads and semiconductors vs S&P 500 are two internals measures that remain supportive of this rally.
For one, liquidity and financial conditions are still relatively supportive of risk assets. On the negative side, global liquidity growth has been stagnating and stocks are overbought relative to liquidity . On the other hand, Some measures of positioning and sentiment are extremely elevated; volatility targeting funds, asset managers and the AAII Bulls/Bears spread for example. But I find it difficult to argue we are close to a major top when overall speculative positioning and hedge fund positioning is where it lies currently.