The best generals lead from the front. Whether in war, on a sports team, commanding an emergency response unit, or running a company, true leaders are out front saying, “Come with me,” not standing behind the troops saying, “You go first.”
The same is true in markets. When the leaders are out front and the troops follow, you have the makings of a strong bull market. For the past few weeks, the generals were charging forward, but the troops were getting tired.
Last week, the generals began to retreat.
S&P 500 and NASDAQ 100
The generals in the NASDAQ took the brunt of the heavy fire, opening near the high of the week and closing near the low. The S&P 500 had a similar week, though the damage was less severe.
Weakness in both came after making new highs the prior week. Now, our attention turns to the rising 60-week moving averages.
Source: Optuma
The Mag Seven
There is no doubt that the Mag Seven remain the generals in this market regime. These are the names everyone thinks about when they think of the “AI Trade,” whatever that means.
The daily chart made a new high on Tuesday before cascading lower on Wednesday and Friday. The May highs and the 50-day moving average become key levels to watch from here.
Source: Optuma
NYSE Advance/Decline Line
Interestingly, the NYSE Advance/Decline Line was stable last week. However, it remains near a one-year low.
Source: Optuma
Aggregate Bonds
Interestingly, despite hotter-than-expected inflation reports, aggregate bonds moved higher for a second consecutive week. As the generals in the equity market were sold, capital appears to have found its way into the bond market.
But let’s be clear. This trend is still guilty until proven innocent, with price sitting well below a declining 40-week moving average.
Source: Optuma
Junk Spreads
While aggregate bonds provided some shelter during last week’s attack on the market generals, investors remain skeptical of junk credit.
The High Yield OAS has been widening since the end of August as investors demand increasingly more compensation to hold junk credit relative to Treasuries.
At the same time, CCC and Below spreads are trading at new cycle highs.
Source: Optuma
Final Thoughts
For months, the market has been able to withstand weakening breadth because the generals kept marching higher. Last week, those generals finally took on some heavy fire.
If the generals continue to retreat, bulls need to be concerned.
