FifthEteran investors usually find that the most important information about market price movement lies beneath the surface. Dubbed “inside market indicators,” these indicators give us a peek “under the hood” of price dynamics: market breadth, sectoral leadership, momentum, etc. These indicators can complement the picture of the health of the current trend. On this front, there were some notable positive developments last week.
Yesterday, we noticed that the S&P 500 is currently near its 200-week moving average which in recent history has indicated approaching a major low. Notably, in 2020 the indicator broke through this support but eventually – and in a short time – pushed back above it.
Likewise, market breadth (quoted from stocks with 52-week highs or lows) is starting to improve very quickly. The chart below shows the number of stocks that reached a new 52-week high on a given day.
Likewise, we had a few days when every sector or even every stock ended higher on the day. This led to very rough days. The detailed group notes that there were only two years when the number of days exceeded 11% by 2%: 2000 and 2008.
This year, we’ve had 12 such days already.
How important are these improvements?
On their own, marginally positive. However, in the rapidly evolving macro context, they can be interpreted more favorably. Here’s why.
Last week, the PMI data – a survey of activity across a wide range of industries – provided a high-frequency reading of the US economy and the news was grim. But dim in a good way. Bear with us for a second.
The New Orders Index (PMI), the most forward-looking component, showed an accelerating bearish momentum in the activity (chart below). This is good because it shows that the economy is cooling down faster than the Fed assumed. This may again raise the specter of a “pivot” towards a slower rate of rate hike (although the 75bp hike in November was more or less achieved).
But it becomes more encouraging. The core price index indicates that inflation could fall very sharply in the not too distant future: perhaps one to two quarters. The relationship may not last this time because the COVID breakup ruined it forever.
However, if it does, it could provide an almost perfect setup for a low market price. This week’s earnings will provide more clues to economic activity: nearly 25% of the S&P 500’s market capitalization reports in the coming days.
Idea Highlight: Microsoft (MSFT)
TOGGLE has analyzed 6 similar occasions in the past where Microsoft’s stock dividend indices have fallen and historically, this has led to an average price increase. This insight has been awarded 6 out of 8 stars in our quality rating.
Get ready: Big Tech’s earnings start today with Microsoft and Alphabet reporting after market close. Here’s what you can expect after MSFT earnings:
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.
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