After hitting record highs last week, the market has stumbled this week.
The S&P 500 is now off 1 percent from its recent high, leaving investors with a simple but puzzling question: Is this the start of the world's most anticipated correction?
According to Ari Wald, head of technical analysis at Oppenheimer, the market internals are still very positive, and he has a chart to make his case.
From October until early June, the S&P 500 was making higher highs but with an ever-declining amount of net new 52-week highs on the New York Stock Exchange. That changed last month.
“When the S&P 500 makes new highs, you want to see a lot of stocks around the market make new highs with it,” said Wald. That’s because in a market top, investors will sell off their small-cap stocks and buy mega-cap shares for safety, Wald said. An increase in companies making new 52-week highs means more companies are participating in the rally.
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“The headline index will mask weakness in the overall market, and that’s a very big concern,” explained Wald. “We’re not seeing that. We saw some warning signs in the second quarter. But since late May, we’re seeing the breadth of participation really start to expand again. So to us, this argues against the bull market top.”
Wald said such a signal worked very well in the recent past. “It kept us on the right side of the trade in 2013,” he said. “We think that the bull market’s intact, and you want to buy pullbacks still.”
Gina Sanchez, founder of Chantico Global, disagrees with Wald’s recommendation. “It’s really hard, in my opinion, to buy pullbacks at this point,” she said. “Not just because we are in such a long bull run, but also because the fundamentals of the economy are still building. And, we still see some weakness, particularly in spending, in wage growth, [and] in disposable income growth. That’s the stuff that powers this economy.”
Sanchez, a CNBC contributor, said that what’s driving the market hasn’t been revenue growth but earnings growth that can sometimes be the product of accounting methods rather than actual profit growth. “It’s hard for me to buy at this point in the market expecting that things are suddenly going to get better,” she added.
Then what is causing more participation in the market’s recent highs? “Some of this is capitulation,” Sanchez said. “There has been a lot of broad index buying, and I do think that there are a lot of market-chasers at this point. So, I think you have to be careful interpreting that breadth as true breadth…. There is a lot of broad-based ETF buying right now. I think that those are market capitulators chasing the market right at the end.”
To see the full discussion on the S&P 500, with Wald on the technicals and Sanchez on the fundamentals, watch the above video.
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