If I wanted to be a bear in this market, I would look for cracks in the foundation. I would also look for places where a major narrative might be under stress.
Fortunately for the bears, there is a compelling case to be made. Only time will tell whether it plays out.
S&P 500 and NASDAQ 100
The stalling pattern in the major averages has now extended into a fourth week. In fairness, this pause is taking place above steadily rising 60-week moving averages, so there is nothing overly concerning from a trend perspective yet. A pause after a strong run is perfectly normal and, frankly, healthy.
Source: Optuma
Breadth, Mag 7, and Semiconductors
If I wanted to be a bear, I would point out that the market's soldiers are marching into battle, but the generals are no longer leading the charge.
The NYSE Advance/Decline Line is at an all-time high. However, the Mag 7 stocks have been moving lower. If the generals continue to slide, the rest of the market will likely begin to retreat. The key tell here is semiconductors.
This chart is where the story lives.
The Mag 7 is the foundation of the market. They are also the primary customers in the AI narrative. It is odd that the Mag 7 is weakening while semiconductors remain near all-time highs. After all, the semis are selling into the AI customers. Why are the chip buyers moving lower while the chip sellers remain near their highs?
Source: Optuma
High Yield Credit
If I were a bear, I would highlight the continued disconnect between High Yield OAS and CCC or Below OAS. Many of the lower-quality companies in the latter group have been participants in funding the AI buildout.
I do not hear enough people talking about this.
Source: Optuma
S&P 600
If I were a bear but had to remain invested by mandate, I would spend my time looking at small-cap stocks.
The S&P 600 is trading at record highs after a strong week. This strength comes after nearly five years of consolidation. The group is benefiting from capital rotating out of the Mag 7, as evidenced by the relative trend moving sharply higher above the 10-week moving average.
Source: Optuma
Seasonality
If I were a bear, I would not be able to lean on seasonality. Historically, July has been one of the stronger months of the year for the S&P 500.
Source: Optuma
Final Thoughts
The purpose of this week’s note is not to make a call; we don’t do that here. It is simply to highlight where there may be weakness in some of the key underpinnings of this bull market and make no mistake we are still in a bull market. However, investors are well served in understanding both sides of the story.
I hope that you all have a happy and safe 4th of July celebrating the 250th birthday of this great nation.
