The S&P 500 closed the week above the much-watched 5,000 level. Here is where I will inject my rant that round numbers in the market are only important because they make nice “milestone” headlines and targets for Wall Street strategists who are rarely right anyway. There is nothing particularly special about the 5,000 level other than that. So, congrats to the analysts who guessed correctly on the S&P 500 at 5,000.
As the index makes new highs, many of the red flags that we highlighted last week remain in play. It is important to note that they can correct themselves through time rather than price. This week we note other “somewhat confusing” trends in the market from a risk-taking perspective.
S&P 500 – Risk On but Extended
New all-time highs for the most watched and most benchmarked index in the U.S. are good for most equity investors. The S&P 500 remains above the rising 60-week moving average, but we note that it has entered extended levels. The 60-week Z-Score stands at 2.383 vs. a 10-year high of 2.805. Over the past decade, trips above the 2-mark have been short-lived.
S&P 600 – Risk Off
When bearish investors want to make a strong point, they will often point out how the Russell 2000 (small caps) is weak. This is unfair because many of the 2,000 stocks in that index are extremely low quality (I am being nice here). The top end of the small-cap landscape is the S&P 600. This group, while not as weak as the R2K, is still more than 10% off its high and has been a steady underperformer.
High Yield Bonds – Risk On
We have not heard much about it in the mainstream financial media, but high yield bonds are on the verge of making a new high above a rising 50-day moving average.
Investment Grade Bonds – Risk Off
As high yield attacks the old highs, investment-grade bonds appear to be in the process of rolling over while trading nowhere near prior peaks.
Transports vs. Semiconductors
Finally, we leave you with this mixed message. Transports remain below their highs, refusing to confirm strength in the broader equity market. At the same time, semiconductors are breaking to new highs.
*All charts are from Optuma as of the close of trading on February 9, 2024. Past performance does not guarantee future results.
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