U.S. stocks have struggled of late, with the Dow Jones Industrial Average on track for its fifth straight negative session, but two factors that may not be obvious to those just looking at the major indexes could give investors a reason to feel optimistic.
Recent volatility has come as uncertainty over global trade policy continues to cast a pall over equities. However, that issue is seen as a bigger potential headwind for large multinational companies, the kind that, due to their size, have a bigger influence on broad market moves. In other words, while major indexes have had difficulty breaking out to new highs, the weakness isn’t as broad-based as it might seem at first glance.
Market breadth, as measured by the ratio of rising stocks in the S&P 500 SPX, -0.21% to the number of falling ones, has held up despite the recent weakness, which points to a stronger base of equity support.
“Underlying breadth points to an eventual new high in price for the S&P 500,” wrote Bespoke Investment Group, in a report cited by Raymond James. The “long-term uptrend channels are still in place.”
Jeffrey Saut, chief investment strategist at Raymond James, cited cumulative advance/decline data for the S&P as a reason to be optimistic. According to the data, the cumulative A/D line is currently at its highest levels of the past 12 months, eclipsing a high hit earlier this year, when both the Dow DJIA, -0.41% and the S&P last traded at records. (The Nasdaq Composite Index COMP, +0.01% boosted by gains in large-capitalization technology and consumer-discretionary stocks, hit a record last week.)
Last month, the A/D line for the New York Stock Exchange hit an all-time high.
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On a technical basis, Wall Street has been looking stronger of late. Currently, 70.34% of S&P 500 components are above their 50-day moving averages, according to data from StockCharts. Last week, this ratio hit 75%, which represented the highest such reading since late January, when major indexes last hit records. This metric can be volatile, but it has been rising steadily since early May, when it hit a recent bottom below 40%.
In another bullish sign, the Russell 2000 RUT, +0.51% index of small-capitalization stocks has recently been hitting new highs, and it has recently been outperforming other equity indexes. It is up 6.1% over the past three months, compared with the 3.2% gain of the Nasdaq, the 0.6% advance of the S&P 500, and the 0.1% decline of the Dow over the same period.
While much of the Russell’s outperformance is due to the components having a higher concentration to domestic revenue—insulating them from both trade issues and currency headwinds—Saut noted that small-caps are “thought of as a ‘leading indicator’ for the broader market,” suggesting their strength could spill out in to other indexes.
