The S&P 500 recently reached an all-time high, yet a closer examination of various market indicators reveals troubling trends that suggest this bullish momentum may not be sustainable. While financial media are quick to celebrate these record levels, several critical metrics indicate potential weaknesses beneath the surface. The dichotomy between price performance and relative strength is particularly concerning for investors who might be over-optimistic about ongoing gains in the market.
One of the most telling signs of weakening market health is the observed negative divergence between the daily price chart of the S&P 500 and its relative strength indicator (RSI). Although the price continues to rise, the RSI trend is moving downward, signaling that the momentum driving the price increase is diminishing. Such divergences have often preceded corrections or trend reversals in the market, suggesting that a cautious approach may be warranted, rather than a full embrace of the current bullish climate.
Further scrutiny of the S&P 500 Bullish Percent Index illustrates a reduction in the number of stocks participating positively in the market. As of Friday, the index reading was at 78%, down from the previous week’s more robust 80%. This downward shift highlights a lack of broad-based support for the S&P’s recent price ascents, indicating that fewer stocks are in “bullish point-and-figure” patterns. Such a concentration of strength could prove precarious if major indices are relying on a shrinking number of constituents for upward movement.
Moreover, examining the new highs versus new lows ratio within the S&P 500 reveals another concerning trend. On the same day that the index reached a new peak, the percent of new highs compared to new lows actually declined. This raises alarms, as it indicates a divergence from historical bullish behavior, where rising prices are typically accompanied by strengthening new highs. Instead, this situation reflects a potential exhaustion of the upward trend, raising questions about the sustainability of current market levels.
Meanwhile, the Nasdaq 100 has failed to set new highs alongside the S&P 500. Historically, this index, which includes major tech giants, has led market movements; however, the inability of the Nasdaq to keep pace with the S&P underscores a shift in market dynamics. Factors such as Federal Reserve rate cuts have ceased to generate the same excitement within tech stocks, indicating that the once-dominant sector may be losing its grip on market leadership. Notably, major players like Nvidia and Tesla, which were previously robust, are not performing as strongly as in early 2024.
Another alarming measure is the New York Stock Exchange Advance/Decline Issues chart. The latest readings reveal that with the S&P’s new high, fewer stocks are advancing compared to those declining, which suggests a lack of market breadth and healthy bullish sentiment. This inability to maintain higher highs particularly raises concerns about the market’s underlying health. The cumulative picture drawn by these various indicators signals that while headline numbers may be optimistic, the fundamental drivers of market strength are faltering, warning investors to tread carefully in their outlook for the near future.