It's The Index's Problem, Not Your Problem

Despite plenty of strength in stocks, the S&P 500 is still stuck below 7000

For a few glorious minutes in late January, the S&P 500 acquired a 7-handle. That surge proved to be short-lived and the index finished last week at a level it first crossed back in October (more than three months ago).

While the index has stalled out, six of the eleven sectors finished last week at new highs, propelled by strong momentum, price and breadth trends. The problem for the index is that these are the six smallest sectors (by weight) in the index. Add in Health Care (which did not make a new high but does remain in the green from a short-term trend perspective) and the seven smallest sectors are, collectively, smaller than the largest sector in the index.

More generally, the smallest sectors are strong and the larger sectors are weak or weakening. Already, two of the larger sectors (Financials and Consumer Discretionary) have dropped below their respective 200-day averages. If Information Technology, which is less than 2% above its 200-day average follows suit, history would caution against continuing to giving the bullish case for the index the benefit of the doubt.

We see a similar message from our Risk Appetite indicator. It has not (yet) signaled a Risk Off environment, but it has certainly begun to move in that direction.