Inside Markets — Deteriorating Internals

Market internals have notably deteriorated over the last few months. Leadership has thinned since late March with each record high in the SPX Index consisting of fewer stocks reaching 52-week highs. Obviously, the Tech sector has been a leader, but defensive sector (Utilities, REITS, Staples, Health Care) outperformance has also emerged over the last several weeks. Defensive sector leadership is typically a bad omen for markets and was a key piece to our bearish warning in mid-late January 2020. Back then, it was Consumer Staples that led the SPX to record highs at the expense of all other sectors. Part of the reason for defensive sector outperformance in the current environment comes from lower yields with Utilities and REITS as bond proxies. The SPX advance/decline line also peaked in mid-May and broke below its 50-day moving average on Friday. Deteriorating market internals need to be watched in coming weeks along with first line technical support at ~5290. Sustained closing levels below 5290 would be the first sign of bullish trend exhaustion.

Tomorrow’s May retail sales number is the macro report of the week given scrutiny surrounding the consumer resilience theme. Retail sales are reported in nominal terms, so it also provide incremental readthroughs on inflation. Thursday’s release of weekly jobless claims also takes on increased importance after last week’s number hit a nine-month high of 242,000, triggering growth concerns. Three consecutive weeks of claims exceeding 260,000 is generally considered an indication of weakening labor markets. Friday’s release of June flash PMIs will also impact the growth narrative. Note that markets will be closed this Wednesday for Juneteenth. Next week brings a number of important catalysts including MU earnings on Wednesday and May core PCE on Friday.