Stock Market’s Rally to Record High Masks Weak Building Blocks

0l{z3v6nor8xnvse2(j2}494_media_dl_1.png Bloomberg

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(Bloomberg) — The record-breaking advance in US stocks has many of the hallmarks of an unloved rally, including narrow leadership, low volumes and muted investor sentiment.

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The equities benchmark is up almost 9% in April, closing above 7,000 for the first time last week. The tech-heavy Nasdaq 100, meanwhile, logged a 13-session rally, its longest winning streak since 2013, before slipping Monday as investors monitored prospects for further peace talks between the US and Iran.

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Both gauges soared in the wake of the ceasefire agreed on roughly two weeks ago, but Wall Street strategists say there are signs the gains are on shaky ground. 

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One red flag is that a limited group of shares is powering the advance. Only about half of S&P 500 members traded above their 50-day averages when the index set a record last week. That’s well below the levels seen when the index last hit an all-time peak in January, and at the time of the then-historic high reached after last year’s tariff turmoil. 

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Beyond the headwinds on the international stage, there are also expectations of weaker corporate guidance this earnings cycle. Add it all together and investors have reason to hold off. 

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“They’re forced to like certain things, but they do not love the whole package,” said JC O’Hara, chief technical strategist at Roth Capital Partners LLC. The way the rally has unfolded implies that “the bulk of the gains are probably behind us.” 

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The S&P 500 Index fell 0.2% on Monday. An equal-weight version of the index gained 0.3% but is still 0.4% from its most recent record in February. The old-economy Dow Jones Industrial Average is down 1.5% from its peak. 

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Moreover, trading volume on the S&P 500 in April has been 11% below the six-month average, while it was 9.6% above that level in March, data compiled by Bloomberg show. To O’Hara, that indicates investors had more conviction in the declines than they do in the recovery.

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“We don’t have an all-clear sign on the macro front,” he said. “Investors are a little skittish to fully jump back in.”

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Dim Sentiment

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A Barclays Plc measure of investor sentiment has declined even as the S&P 500 has surged. The bank says this is an “uncommon outcome given the speed of the rebound.” Indeed, there have only been five other instances in the past 20 years where the indicator slipped during a sharp recovery.

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Euphoria around stocks “has failed to lift off significantly, which is usually not the case whenever the S&P 500 recovers from a deep selloff,” said Stefano Pascale, head of US equity derivatives at Barclays.

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The rebound has been driven by a combination of speculators exiting bets on equities losses and institutional investors who had been underweight being “pulled from the sidelines,” said Mark Hackett, chief market strategist at Nationwide.