How Bad Is This Breadth Thing?
1.) HIGHS/LOWS – I’ve written about “bad breadth” lately and many on FinX or other financial channels raising a stink about it and how bad it is. That of course can scare a lot of people when they describe deterioration underneath the surface of price and the incoming market implosion. Deteriorating participation in the market – measured by breadth – is not something that is good. However, it’s important to look deeper and understand where the deterioration is actually occurring. Last week, 21 of the 28 net new lows came from Utilities, Staples, and Real Estate. So yes, breadth stinks. But where it stinks matters! You can clearly see that this breadth deterioration is coming from very rate sensitive sectors. That makes sense since rates have been on a tear higher. Bull markets tend to be led by growth (tech etc.)…and those appear to be doing ok.
2.) RATES – Markets have a little inflation anxiety these days.
The chart below might look complicated, but it really isn’t. It’s just asking one question: Are stocks and interest rates moving together, or are they moving in opposite directions? Green means they were generally moving together. Red means they were generally moving opposite each other.
Look at all that red from the 1960s through the 1990s. Then look at all the green during much of the 2000s and 2010s.
Since around 2022, when the yield on the 10-year Treasury has gone up, the average stock has tended to struggle. When that yield has come down, stocks have breathed a little easier.
But as Zachariah wrote last week (read that here), what if this move in rates is simply due to the AI build out and a massive demand for capital? That is a very real and likely issue.
Many on Wall Street are looking at a chart like this and saying “Wall Street has changed!” That may be true, but maybe not for the reasons they cite. They’ll tell you that it used to be that when rates were going up, markets were actually doing fine. It was when the Fed cut rates that things were getting into trouble.
Historically, that has been true. But now they want you to think that has all changed.
The 90 correlation of the S&P 500 equal weight and the 10YR Yield might be suggesting that stocks have been struggling with rising rates. But what if that is simply the S&P 500 consolidating some after breaking out on Aug 3?
I’m not going to get all wrapped up about rising rates at this point. Correlation or not.
Yes, the market may have changed. But what changed it?
Right now we have to consider that the change is the massive AI boom. Another technological / industrial revolution.
Yields across the curve are very overbought right now. Does that mean they have to drop/correct? No, but things tend to do that if they stay in an overbought condition for too long.
3.) US DOLLAR – If the US Dollar Index was going to turn and correct some from here…this would be the spot. That could create a very short term headwind for both the S&P 500 and Bitcoin as they both have a very short term (15 day) positive correlation. Oil and Gold have an inverse short term correlation. On a more long term 90 day basis, both the S&P and Bitcoin are negatively corelated. What’s that mean? Both the S&P and Bitcoin are in a “buy the dip” mode and a short term drop in the Dollar Index might provide that opportunity.
