Today’s Relative Strength, Tomorrow’s Narratives

Thoughts on the Market

We’re back from a quick summer breather and hope you got your dose of sunshine too.

Hard to believe, but we’re closing in on 100 trading days since the April lows, and as summer wraps up, it feels like the right moment to zoom out and see the bigger picture.

What still stands out most to us is the remarkable persistence of the trend channel that began with the powerful breadth thrust on May 12. Since then, the S&P 500 has been climbing in a clear channel for 75 trading days now — that’s nearly a third of the trading year — at an annualized rate of change of close to 50%.

And it hasn’t just been up — it’s been steady. Volatility has been scarce, consistent with what we typically see in bullish Breadth Thrust Regimes, where pullbacks are both shallow and short-lived.

The market’s rebound has looked exactly like it should: the sectors you’d expect to lead are leading, and the usual laggards are lagging.

That said, the recent weakness in certain mega-cap Tech stocks has been the result of rotation into Discretionary, Industrials, Financials, and especially Health Care.

This shift into broader sectors has fueled the breakout in the equal-weight S&P 500, which closed at new all-time highs last Friday. Put simply, the average stock is now at an all-time high — clear evidence that market participation remains strong.

Breadth confirmation is also coming from the NYSE advance-decline line, which nearly reached new highs last week, while the percentage of S&P 500 stocks above their 200-day moving average just hit its highest level since December — meaning breadth hasn’t been this strong since the market’s recovery from the April selloff.

The big question now is whether more stocks start hitting new 52-week highs.

Up until now, bearish claims about weak highs lacked support, since the average stock hadn’t broken out yet. But now that we’re here, bears might finally have something to hang their hat on — if the list of new highs doesn’t keep growing.

Right now, though, that’s not really our worry — Financials are hitting new all-time highs, and Discretionary and Industrials are showing bullish setups that could push them even higher.

But remember, when big Tech takes a break, it’s no surprise if the S&P 500 just sits there. Put differently: whenever large-cap Tech leads, the index almost inevitably rises. When Tech takes a back seat, the index tends to drift sideways — even if plenty of other stocks are moving higher.

This dynamic could lead to the typical September weakness we usually see, if it, of course, continues.

A clear example occurred last week, when the index fell -0.6% despite 210 more stocks advancing than declining. That’s pretty rare.

Since 1996, only two other days had stronger breadth with a bigger loss — the last one being July 11, 2024, right before Tech started underperforming the broader market for the next year.

Fun fact: only nine sessions since 1996 have closed in the red while at least 200 more stocks were rising than falling — seven of them happened in the past four years.

In short, the jury is still out. But it’s usually smart to keep an eye on the laggards — they often end up catching up to the leaders, especially in bull markets. And the chart below is a good reminder of when it pays to look outside the index.

The top panel shows the Mag 7 vs the S&P 500 on an equal-weight basis. The bottom compares the cap-weighted Mag 7 to the X7 Index (basically the other 493 names in the S&P, also cap-weighted).

Both ratios have bounced back after a nasty stretch of underperformance, but they remain below prior highs.

To us, that simply signals a broadening of price action for now — nothing more.

So, as long as these ratios stay under their old peaks, it makes sense to keep hunting for opportunities outside the usual suspects.

Now, one area where we still see significant potential for a catch-up trade are small-caps. They’re still heavily shorted, mostly ignored, and the prospect of lower interest rates could finally act as the catalyst to push them to new all-time highs.