Is The Market Sporting More Health Than It Looks?

1.) RATES – Yesterday during Fed Chair Warsh’s press conference, he stated that "…we will achieve our inflation mandate" and "We will deliver price stability." What did the bond market say? I don’t believe you! Yields are currently all in bullish trends from the Fed proxy of the 2YR Yield all the way out to the 30YR Yield. The 10s, 20s, and 30s are all very overbought here, so a pullback would not be surprising. But these yields would all have to fall a long way before they broke their upward (bullish) bias. Until the bond market believes that inflation is contained, these rates likely stay sticky high. What will it take for the bond market to not revolt? Outside of a Fed rate hike, the labor market would have to weaken significantly. That does not look likely with the labor market showing strength recently. As I write, the 10-year Treasury yield is pushing around 4.68%, while the 30-year Treasury has climbed above 5.20%, the highest levels we’ve seen since 2007. The 10-year Treasury is the benchmark for the financial system. The 30-year Treasury helps drive mortgage rates. So they are important to the plumbing of the financial system. The day the Fed began cutting rates back in 2024 turned out to be almost exactly when long-term yields stopped falling and started climbing. Now, we’re seeing the same lesson from the other direction. By the time the Fed actually changes policy, the bond market has usually been making that move for a while. The market decides what money costs. The Fed reacts. Yesterday was just another reminder that even though the news said there were no rate hikes, the market said rates were going higher anyway. The bond market is fighting the inflation the Fed is currently ignoring.

2.) RETAIL – As you know, I like contrarian indicators. Retail investors also tend to give some of the best contrarian indicators in the system. When they buy en masse, selling or protecting might not be a bad idea. When they sell en masse, buying or holding might be a good move. So what has the retail army been doing lately? Well, retail sold a net $243 million of single stocks yesterday, marking the largest one-day outflow since the COVID crash. Buying around and during the whole COVID mess turned out to be a good idea, even though it was VERY uncomfortable to do so at the time. As the old saying goes, when the time to buy comes, you won’t want to. Is the retail army always wrong? No, but the idea is to be aware of the herd at extremes.

3.) TRENDS – Also, as you know if you’ve been reading me for a while, the trend is your friend. As I noted yesterday, flows, sentiment, and trend are the big three in terms of deciphering market health. What are we seeing beneath the surface in terms of overall trends? They are rebuilding! More stocks are moving into healthy uptrends. The criteria for a healthy trend are the two big, mostly watched moving averages (the 50 and 200 day) rising, closes occurring above that 50-day average, and the 50-day above the 200-day average. Those items together spell a healthy uptrend in stocks or whatever asset you might be watching. Right now, we have the highest level of S&P 500 stocks meeting those criteria since March…191 of the S&P 500 stocks. March 31 was the low of that pullback. Have we reached that same point? There’s more evidence pointing toward that scenario than not. In the chart below, the green line tracks the number of S&P 500 stocks meeting a 4 out of 4 trend criteria. This is happening while the index itself has spent the past two months correcting/grinding sideways. On the surface, that can look like a tired market. The S&P 500 has stopped making clear upside progress. It would be easy to look at the index alone and assume the rally is losing energy. But the breadth data is saying something different right now. Price stagnating but holding above these key averages is not weakness; it’s repair. The red line in the chart below adds another important piece of evidence. The number of stocks with a trend count of 0 out of 4 has dropped to 37, the lowest level since July 2025. So this is not just the strongest stocks getting stronger. The weakest part of the market is shrinking too. A flat index with fewer stocks participating would be a warning. A flat index with more stocks improving underneath is very different. It means the market is using time, not price, to build a base. That appears to be where we are right now. Patience.