This article is written exclusively for Investing.com
The record reached August 18, completely wiping out the March sale. But despite the appearance of a healthy stock market, problems are looming beneath the surface.
The number of stocks above their 50-day moving average has been declining in recent weeks, while the S&P 500's equal weight ETF failed to pass its June 8th high.
Numerous largecap stocks have lagged behind in this rally, with a few even bouncing below their 50-day moving average in recent weeks. Companies such as Intel (NASDAQ :), Micron Technology (NASDAQ 🙂 and AT&T (NYSE 🙂 have recently fallen below their 50-day moving average.
Meanwhile, the SPX continues to run higher, boosted by only a handful of stocks like Amazon (NASDAQ :), Facebook (NASDAQ 🙂 and Nvidia (NASDAQ :).
Difference Between RSP and SPY
Nothing highlights the sharp divergence better than the Invesco S&P 500® Equal Weight ETF (NYSE :), which is down by about 5.5% by 2020 down from the SPDR S&P 500 Fund (NYSE 🙂 earnings of about 5%. The main difference is in the construction of the index, with many of the major technology stocks responsible for and given greater weighting due to their massive market caps in the main index.
Losing momentum
More importantly, it appears that the number of stocks has declined above their 50-day moving average, which suggests that the recent rally will be even more selective. Since August 12, the number of stocks has fallen above their 50-day moving average in the S&P 500 to 68% on August 20 from 81.2% earlier in August.
Meanwhile, the forward-declining line that follows the number of rising and falling stocks recently peaked in the S&P 500 on August 12 at 1222.53 hours. Since then, that line has been lower, despite the S&P 500 index moving closer and closer to that record.
SPX Advancers / Decliners Daily
Overall, the number of declining stocks with positive momentum seems to suggest that the recent rally is weaker than it appears, and one has to wonder how long the rally can last. After all, with companies like Intel and Micron falling sharply in recent weeks, it could even send alerts about the health of the industry they represent.
Not all recovered equally
Stock and sector weakness is relatively broad with Citigroup (NYSE :), Eli Lilly (NYSE 🙂 and Exxon Mobil (NYSE 🙂 all struggling to recapture or hold movements above their 50-day moving average. The weakness of this large group of stocks is probably one of the reasons why the ETF of equal weight lags by such a large margin, as the ETF does not give higher weight to the companies with larger market caps.
While it's great to see the S&P 500 recoup all of its losses from its February and March lows to its nationwide shutdown, it comes with the caveat that not all stocks have recovered equally and not all stocks have a sharp rebound. The recent highs in the market may even highlight inequality between stocks and sectors.
Only time will tell how sustainable the rally is and whether higher highs are on the way.
