Market Overview
The S&P 500 continues to hold near its highs, but conditions beneath the surface have become considerably less supportive. While the major index remains technically healthy, market participation has weakened substantially, with only about one-quarter of S&P 500 stocks now trading above their 50-day moving averages.
At the same time, the 10-year Treasury yield has risen sharply to nearly 5.3%, adding another important headwind for equities. These warning signs do not necessarily mean that a market correction is imminent, particularly while the S&P 500 continues to hold above important support. However, the combination of narrowing participation and rapidly rising interest rates warrants increased caution. For now, I believe the market's price action should be respected while we watch closely for either improving conditions beneath the surface or confirmation that these warning signs are beginning to affect the broader market.
SPY: The Market Continues to Hold Up
The S&P 500 continues to show surprising resilience despite an increasingly challenging interest-rate environment. During September, the index tested its rising 50-day moving average but quickly recovered and is once again trading above its major short-term moving averages. An important area of support also remains intact.
Since reaching new highs in August, the market has largely consolidated rather than suffered any meaningful technical deterioration. A move above the recent highs would be another positive development, while a break below support and the 50-day moving average would cause me to become more cautious.
Market Breadth: The Warning Gets Stronger
The strength of the S&P 500 is masking considerable weakness beneath the surface. Only about 25% of the stocks in the index are currently trading above their respective 50-day moving averages, down sharply from approximately 43% when we examined this indicator last month.
This creates an increasingly significant divergence between the index and the average stock. While the S&P 500 remains near its highs, roughly three-quarters of its components are now trading below their intermediate-term moving averages. This does not necessarily mean a market correction is imminent, but it is a meaningful warning that participation in the advance has become increasingly narrow.
10-Year Treasury Yield: A Growing Headwind
Rising interest rates remain one of the most important risks facing the stock market. The 10-year Treasury yield has climbed from approximately 4% in March to nearly 5.3% today, with the advance accelerating considerably during September.
Higher interest rates increase competition for investment dollars and can pressure stock valuations while also raising borrowing costs throughout the economy. Last month, I noted that a move above 5% would increase my concern. With that threshold now decisively exceeded, the continued rise in yields deserves close attention, particularly when combined with the significant deterioration we are seeing in market breadth.
Client Account Update
Client accounts remain invested, but with a cautious approach given the deterioration in market breadth and the continued rise in interest rates. In the aggressive model, I am maintaining exposure to a select group of stocks that continue to demonstrate favorable technical characteristics while also keeping a meaningful amount of cash available. This provides flexibility to increase exposure quickly if market conditions improve, while limiting risk should the current warning signs begin to affect the broader market.
The conservative model holds similar equity positions but at substantially reduced position sizes, consistent with its lower overall equity target. A significant portion of the portfolio also remains invested in bonds, which continue to perform well and provide diversification during the current period of increased uncertainty.
For now, I believe this balanced approach is appropriate. I am participating where opportunities remain attractive, while maintaining sufficient flexibility to become either more aggressive or more defensive as the market provides additional evidence.