Market Overview
The market looked noticeably different over the past month. Increased volatility in the major indexes and weakness in several former leadership groups initially raised concerns that a broader pullback might be developing. However, a closer look beneath the surface reveals a more constructive picture.
Rather than signaling widespread deterioration, recent market action appears to reflect a rotation of capital into new sectors and industry groups. This broadening of leadership is encouraging and suggests the underlying bull market remains intact, even as the market transitions away from some of its previous leaders.
The charts that follow explain why I remain constructive on the market while closely monitoring key support levels in the major indexes.
SPY: A Change in Short-Term Character
The first chart follows the S&P 500 from the first quarter correction through the breakout and into the recent period of increased volatility.
Since advancing above the highs of the prior consolidation, the index has remained in a healthy long-term uptrend.
What has changed over the past month is the market's short-term character. Rather than advancing steadily above its short-term moving averages as it did during April and May, the index has become more volatile. Price has experienced larger daily swings and has fallen below its 21-day exponential moving average several times. It is now trading just above its 50-day simple moving average, an important level of support that I will be watching closely.
Viewed in isolation, this chart suggests that the market has become more vulnerable to a short-term pullback. However, as the remaining charts will illustrate, looking beneath the surface tells a more constructive story. While market leadership is shifting, the evidence continues to support the broader bullish trend.
RSP: The Average Stock Tells a Different Story
While the S&P 500 has become more volatile over the past month, the Equal Weight S&P 500 tells a very different story. Unlike the capitalization-weighted index, RSP continues to trend steadily higher with little evidence of deterioration.
The chart recently reached a new all-time high and remains above its rising 10 and 21-day exponential moving averages, as well as its 50 and 200-day simple moving averages. This type of price action is characteristic of a healthy uptrend and suggests that the average stock continues to participate in the market's advance.
I believe this is an important distinction. Although the major indexes have become more volatile, the underlying market remains constructive. Rather than signaling broad market weakness, this chart suggests that investors are rotating into a wider range of stocks, a characteristic that is often associated with healthy bull markets.
Leadership Is Expanding
The final chart highlights four sectors/industry groups that have recently displayed strong relative strength: Financials, Industrials, Healthcare, and Software. While leadership in semiconductors has cooled after a significant advance, these areas have moved higher, illustrating that investors are rotating into new opportunities rather than exiting the market altogether.
The recent advances, highlighted by the green arrows, reinforce the idea that the market's leadership is broadening. Instead of relying on a single sector to drive the indexes higher, strength is now appearing across multiple areas of the market. This type of rotation is often a positive characteristic of a healthy bull market because it helps sustain the broader advance.
Software is particularly noteworthy. After spending much of the past year in a pronounced downtrend, the group has broken above a long-term downtrend line and is beginning to show meaningful relative strength. If that trend continues, software could become one of the market's next leadership groups.
Taken together, these charts suggest that while the market's leadership is evolving, the underlying trend remains constructive. Rather than signaling the end of the bull market, the recent rotation appears to be reinforcing it.
Client Account Update
Client accounts remain nearly fully invested. During the past month, I sold one of our core semiconductor positions after a strong advance and redeployed much of that capital into software companies that have recently begun displaying improving technical strength and relative performance.
This portfolio adjustment reflects the changing leadership discussed throughout this newsletter. While semiconductors have paused after leading the market higher for several months, software has emerged as a promising area of strength. The positive price action in these new positions has reinforced my conviction that leadership is broadening rather than deteriorating.
Although I currently have a modest cash position, my outlook remains constructive. If market conditions continue to support the bullish thesis outlined in this month's newsletter, I expect to selectively deploy that remaining capital into stocks demonstrating the strongest combination of technical strength and relative performance.