Wavering Breadth and Interest Rates

1/?It Is OK to Be Bullish The S&P 500, But Not The Market of Stocks

Déjà vu all over again. Party like it's 2023!? Breadth is weakening again for the broad market, and it seems like we are heading back into the have’s vs the have-nots; mega-cap growth vs everything else.? The Mag 7 vs the S&P 493.? A big part of our market view last year was that it was OK to be bullish on the stock market (S&P 500) but not the market of stocks (Russell 3000).? In fact, there was nothing really wrong with the S&P 500 last year, which carved out its bear market bottom in October ’21, and put in place a series of higher highs and higher lows after that.? The uptrend was confirmed by the Advance-Decline Line, which recently made a new high.? However, the broader equity complex remains longer-term challenged, as shown by the R3K AD Line.? Notice the higher highs in the S&P 500’s AD Line, whereas the Russell 3000 has lower highs. This divergence does not have to be bearish per se, but it does mean being selective and tactical in stock selection/portfolio construction while making advances above and beyond ATHs on SPX vulnerable to idiosyncratic risk.

2/ Breadth and Rates Are Linked

We are being reminded again as we were for all of 2023, that interest rates and breadth are inversely related.? Chart 2 shows the rolling correlation between the US 10-year Yield and the Russell 3000 AD Line.

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