- The potential for a stock-market rally that extends further into the summer is being undermined by a few market-based indicators, according to Bank of America.
- Stephen Suttmeier, the chief equity technical strategist at Bank of America, identified three that sputtered at the end of June – and which bear close watching in the weeks ahead.
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The news flow around coronavirus infection rates and how various states are responding continues to drive market volatility and keep investors on their toes.
In addition to the evolving situation on the ground, there are market-based indicators that are just as useful in clueing investors on what happens to stocks next.
That's where Bank of America's team of technical analysts come in, as experts who use trends and charts to analyze the market. They recently highlighted multiple indicators that threaten the summer rally — one which has already brought the S&P 500 within 5% of its all-time high after a record-breaking crash and kept alive hopes of a swift economic recovery.
"Although seasonality is bullish and sentiment remains mostly constructive, this deterioration across several notable market indicators could delay and/or could test our conviction in a summer rally for US equities," said Stephen Suttmeier, the chief equity technical strategist at Bank of America.
Without further ado, here are three of the indicators on his radar that recently sent distress signals:
1. Stock-market breadth
Suttmeier's indicator of breadth is the advance-decline line, which measures the difference between the number of rising and falling stocks to gauge which way the momentum is leaning towards.
In early June, there were disproportionately more advancing companies than decliners listed on both the New York Stock Exchange and in the S&P 500. These trends helped confirm the rally that rounded out the benchmark index's best quarterly percentage gain since 1998.
However, this breadth indicator began to weaken in June. Suttmeier considers the slump a risk for the month of July, which is seasonally a strong period for the market.
2. The share of stocks above key moving averages
This set of indicators is similar to the aforementioned advance-decline line in that it also gauges the broader market's relative tilt.
Suttmeier flagged a recent new near-term lows in the percentage share of S&P 500 stocks which were above their 50- and 200-day moving averages. On Friday, June 26, the S&P 500 actually closed below its 200-day moving average — a development that should have unnerved anyone counting on an unabated rally.
3. The performance of junk bonds
A rally in high yield — specifically the iShares iBoxx High Yield Corporate Bond exchange-traded fund — helped confirm the stock market's strength in early June.
After all, this ETF tracks an index of companies with lower credit ratings and more risk of defaulting on their debt in an economic crisis.
For proof of its importance in this environment, consider that it is one of the select few ETFs that the Federal Reserve is buying directly as part of its economic stimulus.
"If HYG sustains a tactical breakdown, the risk is deteriorating credit markets is a bearish leading indicator for the S&P 500," Suttmeier concluded.
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