Both stock and bond markets have steadied themselves to start the third quarter. This hasn’t yet resulted in a meaningful market rally, but the fast declines of June have not reappeared. There’s been attempts too, attempts for the swift selling to resume itself. So far, though, on those days where sell-offs try to take hold, we’ve seen improving price action.
What is price action?
Price action in the market refers to how the price of a security behaves. Does it have an easier time rising or falling? Does it recover from declines or fail to hold on to advances? The first half of this year was marked by falling prices, a failure to recover those losses, or an inability to hold onto any gains. Price action has been very poor. That is showing signs of changing.
Following July 7th, the SPY ETF (which tracks the S&P 500), gapped down five days in a row (from July 8th-July 14th), falling from $387 to $371 in the process. A gap down means the SPY opened lower than where it closed the previous day (impacted by the futures market). These gaps down give us a unique chance to observe price action. In the first half of the year, gaps down in SPY were typically followed by more declines during the day. Yet, after all of the gaps down from July 8th-July 14th, SPY managed to finish the week near $385, well off of its $371 low.
SPY’s price action has improved in the sense that it showed an ability to recover from losses. It seems that it may finally be having a hard time going lower. In the first half of the year, it could not recover from losses and had an easy time moving lower. To be sure, the SPY is still down nearly 20% on the year, but improving leadership may help cut those losses in the second half of the year.
Better leadership in the market
Leadership in the stock market is a function of market weighted impact. Apple and Microsoft, for instance, make up 13% of the S&P 500 index. For every 10% they collectively rise or fall, the S&P 500 rallies or declines by 1.3%. There’s 250 stocks in the entire index that don’t even combine for as much of a market weighted impact as Apple and Microsoft do. So it’s encouraging to see that Apple (red line), after leading the SPY lower (black line) for the first half of the year, may be trying to lead it higher now:
Apple has already moved towards its June high and back in the vicinity of its March lows. If the market manages to “follow its leader” to the same levels, it translates to 6.50% worth of upside, near 4,100 on the S&P 500.
Less positively, Microsoft is still struggling to move higher and hasn’t yet been able to impact the SPY higher:
Beyond the top two stocks, there are some changes worth noting inside the top 10 stocks in the SPY. Nvidia, Berkshire Hathaway, Meta (FKA Facebook), and United Health were the number 7, 8, 9, and 10 weighted holdings in the SPY at the end of March.
Today, Nvidia and Meta are 10th and 11th. Berkshire, Johnson & Johnson, and United Health have moved up to 7, 8, and 9. It’s a welcome sign then, to see a stock like United Health perform so well versus the SPY over the last few weeks:
As market leadership changes inside the top 10, the stocks that matter most to the market changes as well.
Exxon Mobil isn’t in the top 10 (its 11th), but it’s 39% year-to-date gain makes it the largest best performing stock in the index this year. A recent 20% slide in Exxon that started in June has shown signs of stabilizing. If it can turn back up, that would be a positive sign for the broader market. Notice that Exxon’s June tumble happened alongside a sharp drop in the S&P 500:
Still need to see better
Markets remain in a precarious position and the negative headlines aren’t likely to go away anytime soon. But every market bottom in history has occurred in the face of grave headlines. While it’s unclear if the market has bottomed out, we are at least starting to see some positive signs. Over the last week, the market showed an ability to absorb bouts of selling that otherwise resulted in lower prices during the first half of the year. In addition, Apple, the most important stock in the market, has moved back near one month highs.
While there is still much to be desired in the way of better market performance, we’ve got to start some where. Long term bottoms that are usually only apparent in hindsight always start out as short-term bottoms first. So we’ll take the glass half full approach and consider that the market looks like it may have a short-term bottom in place.
Moving forward, the date that markets are fixated on is July 27th. That’s the date of the next Fed meeting when they are expected to again raise their benchmark interest rate by 0.75%. But from our vantage point, a more important date may be July 28th. That is when Apple reports its latest quarterly earnings. If the most important stock in the market stays steady following its earnings report, that will be reason for further optimism into the back half of the year.
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