Veteran investors usually find most meaningful information about market price action to be underneath the surface. Dubbed “market internals,” these indicators give us a peek “under the hood” of the price dynamics: market breadth, sector leadership, momentum, etc. These can complete the picture of the current trend’s health. On that front, there were some notable positive developments last week.
We noted yesterday that the S&P 500 is currently sitting near the 200-week moving average that, in recent history, signaled proximity to a major low. Notably, in 2020 the index broke through that support but eventually - and in short order - rallied violently back above it.
Similarly, market breadth (proxied by stocks making new 52-week highs or lows) has begun to improve very rapidly. The chart below shows the number of stocks that reach a new 52-week high in a given day.
Similarly, we had a few days when every sector or even every stock ended up higher on the day. That has led to some very punchy days. Bespoke group notes there have been only two years when the number of up 2% days exceeded 11: 2000 and 2008.
This year, we have had 12 such days already.
How meaningful are these improvements?
On their own, marginally positive. However, in the fast-evolving macro context, they could be interpreted much more positively. Here's why.
Last week, PMI data - surveying activity across a wide swath of industries - provided a high-frequency read on the U.S. economy and the news was bleak. But bleak in a good-ish kind of way. Bear with us for a second.
The PMI new orders index, the most forward looking component of the lot, showed a fast-accelerating downward momentum in activity (chart below). This is good because it shows the economy is cooling off faster than perhaps the Fed had assumed. And that might once again raise the specter of a “pivot” towards a slower pace of rate hikes (albeit a November 75 bps hike is more or less baked in).
But it gets more encouraging. The underlying price index suggests that inflation could come down quite sharply in the not too distant future: probably one to two quarters. The relationship might not hold this time because the COVID dislocation ruined it forever.
If it does, however, that could provide the almost perfect set up for a market low. This week’s earnings will provide a lot more clues to economic activity: Almost 25% of the S&P 500 market cap reports in the coming days.
Idea Spotlight: Microsoft (MSFT)
TOGGLE analyzed 6 similar occasions in the past where equity yield indicators for Microsoft dropped and historically, this led to a median increase in price. This insight received 6 out of 8 stars in our quality assessment.
Get ready: Big Tech earnings kick off today as both Microsoft and after market close. Here's what you could expect post MSFT earnings:
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.