Stock participation in the S&P 500 Index remains low but it is improving. Although on Friday the participation reading closed at 55.1%, which is much better than the previous week’s close in the low 30’s, is still low. In our experience, unless the participation number falls below 30%, it is not necessary an indication of a bear market or corrective period to begin. Greenwich Creek’s Main Trend of VIX is bearish and it has been for quite some time now. In agreement with it, the open interest in VIX futures (volatility / risk) is also down and breaking below its 200 day MA.
Some weakness in breadth indicators in addition to seasonality, makes us believe that the stock market in the US could enter a period of consolidation or even experienced a selloff if the weakness continues. This type of market action could be associated with a combination of factors such as infrastructure plan, fiscal policy and inflation. But moving beyond the summer and early autumn, we are currently ruling out the possibility that the S&P 500 and Nasdaq may have established a major top. This means that if there is a selloff or correction in the stock market, it may be short lived.
Last week the yield curve made a flattening move due to the narrowing of the spread between the 10 year Treasury Yield (TSY) and the 5 year TSY. After the FED comments on inflation, the 5 year yield moved up to challenge the early April top (Chart 1 marked with a pink horizontal dotted line), while the 10 year moved down and remains well below the highs reached in March / April (Chart 2 marked with a descending dotted pink line). In our view the 10 year TSY is in a consolidation process that will be resolved up and returning to the usual positive correlation between the 2 year, the 5 year and 10 year yields. We see no signs of stress in the credit markets, which is positive for stocks. And the FED continues to expand its balance sheet to over $8 Trillion.
Last but not least, the appetite for growth investments seems to be returning to the front row while value, such as financials, industrials and materials got temporarily hit.
Chart 1
Chart provided by TradeStation
Chart 2
Chart provided by TradeStation
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