Stocks Bounce, But Questions Persist
Headline improvements are not producing the strength beneath the surface that argues that a buildable low is in place.
A favorable news backdrop last week fueled a surge by stocks but a new week brings new questions. It also serves as a reminder that at least half of what we see daily and weekly from individual stocks and sectors is a reflection of the macro environment. Beyond the headlines, the resilience of last week’s rally faces important tests. As encouraging as it was to see bullish behavior re-emerge last week, sustained rallies are more often about a persistent grind higher than splashy swings or the notching of noteworthy point gains.
In this week’s note we review what we saw last week that is encouraging, what grabbed the headlines and what the rally needs to do next to prove doubters wrong. It is noteworthy that last week’s bounce was not broad enough to produce a breadth thrust by our reckoning, and that alone offers reason to be cautious about extrapolating too much from a single week’s worth of stock market action.
Last week’s rally produced a sharp expansion in global breadth, with the percentage of ACWI markets above their 50-day averages climbing to its highest level since prior to the late-February outbreak of active hostilities in the Middle East. The percentage of markets above their 200-day averages has remained above 50%, a sign that the longer-term global backdrop has proven, thus far, to be resilient.
Moreover, last week saw a return of more markets making new highs than new lows.
Improving global breadth and the return of more stocks making new highs than new lows on a weekly basis was consistent with bull market behavior.
We also saw this in the expansion in the number of sectors above their 200-day average. But this improvement comes with a caveat:
