US stock market today is experiencing a slight pullback, which may seem minor at first glance.
Since reaching an all-time high on December 6 of last year, the S&P 500's fall is not entirely surprising. As of Thursday, the index has dipped by 3%. Yet, beneath the surface, the internal dynamics of the index have been substantially impacted, making what seems like a trivial drop feel more severe for investors.
As of Tuesday, only 19% of the stocks in the S&P 500 have seen gains since that peak in December. More than half of the stocks in the index have declined by at least 5%, with approximately 20% suffering losses of nearly 10% or more. Other technical indicators also suggest that the trading environment for most stocks has been exceedingly poor over the past six weeks.
A popular technical breadth indicator, which measures the percentage of S&P 500 stocks trading above their 200-day moving average, has dropped dramatically. From about 75% on December 6, this figure plummeted to as low as 50% by Monday, marking the lowest level since November 2023.
Adam Turnquist, Chief Technical Strategist at LPL Financial, highlighted that this breadth indicator fell by 25 percentage points, while the S&P 500 itself only dropped by 4%. This discrepancy serves as a warning sign for investors in the short term.
In a report released on Monday, Turnquist explained, "This divergence between price and breadth indicates that fewer stocks are breaking out to new highs after the election day. While such divergences can persist for an extended period, they often signal potential risks for a stalled rebound."
Turnquist offered a cautionary note: if the percentage of S&P 500 stocks trading above their 200-day moving average falls below 48%, future returns could be lackluster. Historical data shows that in such scenarios, the average return over the subsequent 12 months is -7.3%.
He also pointed out that the 200-day moving average level of approximately 5,585 points serves as a reasonable support for the index. Reaching this level would imply a further decline of 6% from current levels.
Another measure of deteriorating market breadth is the equal-weighted S&P 500 Index. Since December 6, this index has experienced a drop of up to 7%, nearly double the decline of the traditional S&P 500 during the same timeframe.
Dan Greenhaus, Chief Strategist at Solus Alternative Asset Management, emphasized this breadth divergence during an interview. He pointed out that certain stocks have experienced steep declines, with companies like AMD and Micron falling 30%, 40%, or even 50% from their peaks.
Greenhaus remarked, "Focusing solely on headlines and stating that 'stocks are down 3%, 4%, or 5% from their highs' can be misleading. This clearly overlooks the larger story."
Despite the recent sell-off damaging the internal structure of the US stock market, Turnquist views this situation as a potential buying opportunity for investors, even if the market continues to decline.
He stated, "The positive aspect of a larger pullback is that it may provide opportunities to buy back into a bull market. Most importantly, the S&P 500 remains above its long-term uptrend, and the fundamentals are solid."
Greenhaus concurs, particularly regarding the flourishing narratives surrounding AI and the broader technology sector. He believes that as long as the fundamentals remain robust, investing in US stocks at current levels is a sound strategy.
"If you believe many of these stories remain intact, then this is a tremendous buying opportunity," Greenhaus asserted.
In summary, while the S&P 500 Index may appear stable on the surface, the underlying trends reveal a more complicated and challenging landscape for investors. The significant pullbacks and the alarming breadth indicators highlight the need for careful analysis and strategic planning. Investors should remain vigilant and consider both the risks and opportunities that lie ahead.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
