The S&P 500 is also losing some if its participants in the rally. Throughout May and June, less and less of component companies are moving higher in established uptrends. During highs that were established over the last six months, bullish breadth readings clocked in near 75%. Bullishness via the Bullish Percentage Index (BPI) for the S&P 500 is about as weak as it was in February.
We can even take a look at the slope of the advance/decline line for the S&P 500. The way that I view it, the appeal of all risk assets in the large-cap universe had shot out of a cannon in the first half of 2013. And while the desire tapered off a bit between the 2nd half of 2013 and the end of 2014, the passion was still there. In 2015, however, the S&P 500 A/D line has flattened out. Granted, the benchmark can still move higher with less and less corporate shares participating; market-cap weighted indexes concentrated in the “Apples” will do that. On the flip side, weakening breadth can also mark a turning point such that stocks will move dramatically higher or dramatically lower.
Indeed, we have been approaching a critical crossroads. The Federal Reserve is deciding whether to begin a campaign of tightening borrowing costs slightly or to wait for definitive data that is unlikely to ever confirm genuine economic strength. More importantly, what the Fed actually does will be far less important than the interpretation by the global investing community. The Fed might raise rates 0.125% at a 2015 meeting that is so slow, risk-takers would likely celebrate; the Fed might raise overnight lending rates 0.25% while simultaneously expressing that they won’t do so again until three months of upbeat data. Conversely, the Fed could misread the signals by simply hiking borrowing costs on the belief that the economy is healthy enough to withstand the heat, spiking volatility in treasuries as well as equities. Or, they might sound so downbeat in their assessment, stocks could flounder on recessionary fears.
In other words, different things matter at different times. Keep an eye on the iShares 7-10 Year Treasury Bond ETF (IEF). If the price of IEF climbs above and stays above its 200-day moving average, it may suggest that fears of Fed rate hikes were overblown. Stocks would likely benefit from contained borrowing costs. In contrast, if IEF stays below its 200-day and drops significantly below its June low near 104, expect corrective activity for riskier stock assets.