While justifiable concerns for US equities exist, Ari Wald, Technical Analyst at Oppenheimer believes that the positive evidence is more convincing and he recommends staying long the S&P 500.
Wald says that the latest bearish rhetoric – which has centred on issues of internal breadth, leadership indicators and the credit market – is outweighed by positive evidence. In his view, the S&P 500’s breakout should be respected (i.e., stay long as long as the breakout holds).
Internal breadth indicators remain unconfirmed across the board. For example, the number of NYSE stocks making new 52-week highs has ebbed lower in November while the S&P 500 has rallied. The S&P 400, S&P 600 and Russell 2000 remain below their prior highs, which is troubling because as Wald says points out advances that continue tend to be advances led by many stocks, not few.
However, Wald thinks that it may only be a matter of time before these small- and mid-cap stock indices rally to new highs. After a year of sideways trading, he believes the failed breakdown by SMID-caps in October can be viewed as a signal of capitulation that is setting the stage for new highs in the coming months. He is also encouraged that the S&P 1000 SMID-cap index is back above its smooth uptrend and in a position to break to the upside (see chart). In his view, such a breakout would be a sign of the next broad-based equity advance.
Wald says that bears also point to signs of risk-averse leadership. The ratio of the consumer discretionary sector vs the consumer staples sector has been trending lower since March, indicating a preference for the relatively more defensive segment of the consumer sector.
However, Wald points out that not all market leadership measures have been as dire as this consumer relationship. He specifically views the 80-year breakout for the Dow Jones Transportation Average (a proxy for US economic growth) versus the SPX as convincing bullish leadership (see chart). Wald thinks the momentum of the breakout argues for continued Transportation leadership in the months ahead.
With regard to the credit markets, whilst the spread between high yield debt and US treasuries is high (an indicator of risk-averse conditions), Wald thinks that high yield debt may be oversold and in a position to reverse higher, which would have bullish implications for stocks due to their correlated relationship (see chart).
In summary, Wald thinks that even if one believes that the market is telling us that conditions are not healthy, one should be selling the areas of the market that are weak, not the S&P 500. In his opinion, these weak areas include high-yield debt, European stocks and small caps.