Is a Bad Moon Rising for the Stock Market?

Wed, Jul 24, 2019 - 4:40pm

As a follow-up to my last article (US Stock Market Showing Tech-Bubble Divergence), further warning signs are continuing to build that give us caution on the outlook for equities.

High yield option-adjusted spreads (OAS) are not confirming the new high in the S&P 500 and have worsened over the last three weeks.

high yield OAS
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

Same deal goes for investment grade corporate bond spreads to US Treasuries:

moodys BAA corporate
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

We are also seeing some early warning signs coming from Bank of America’s Market and Liquidity Risk Indexes relative to the S&P 500. While the following chart is a bit busy, you can see at the two 2018 peaks in the S&P 500 that the BOFA indices worsened prior to the S&P 500’s peak.

bofa liquidity risk
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

They also gave an early warning prior to the S&P 500’s May peak and they are currently worsening again, potentially warning of a market pullback ahead.

bofa early warning
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

We are also seeing some decent divergences between the % of S&P 500 members hitting new 52-week highs as the S&P 500 itself is hitting new highs, indicating thinning participation in the S&P 500’s rally over the last month.

stock market breadth
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

Bottom-line: We are currently taking a cautious stance on the overall market outlook until these and other divergences mentioned in my last article begin to wane.

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About the Author

Chief Investment Officer
chris [dot] puplava [at] financialsense [dot] com ()