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A plethora of economic and geopolitical challenges to the health of this baby bull market, such as a soaring 10-year bond yield, an increasing likelihood of additional rate hikes, and a potential economic crisis in China, caused global equity markets to experience an accelerated attempt to lock in gains from the recent nine-month advance. However, we don’t think this is the beginning of the end of the nascent bull market, writes Sam Stovall, chief investment strategist at CFRA Research.

As of Aug. 17, all major US and international equity benchmarks, including the S&P 500, MidCap 400, SmallCap 600, Nasdaq 100, MSCI-EAFE, and MSCI-Emerging markets indices, along with eight of 11 S&P 500 sectors, broke below their 50-day moving averages, a measure of near-term support.

Many have recently been testing their 200-day averages, and some have already sliced through this measure of long-term support. Not surprisingly, the technical backdrop has deteriorated, as the breadth of leadership has narrowed significantly.

S&P 500 ETF Trust (SPY)

Recently, only 22% of the 153 S&P 1500 sub-industries were seen trading above both their 50-day and 200-day averages, versus the 71% seen at the end of July. Add typically weak seasonality to the mix, and investors may have to endure declining share prices and rising volatility through the end of the third quarter.

But we see the S&P 500 benefiting from this much-needed digestion of gains. Week-to-date through Aug. 17, all sizes, styles, and sectors within the S&P Composite 1500 declined in price, along with 95% of its sub-industries.

Auto manufacturers, drug retail, and independent power producers dropped by more than 7%, while apparel retail, coal & consumable fuels, semiconductors, and steel each gained 1% or more.

About the Author

As chief investment strategist, Sam Stovall serves as analyst, publisher, and communicator of CFRA's outlooks for the economy, market, and sectors. He focuses on market history and valuations, as well as industry momentum strategies.

Mr. Stovall is the author of The Seven Rules of Wall Street and writes weekly Sector Watch and Investment Policy Committee meeting notes on CFRA's MarketScope Advisor platform. His work is also found in CFRA's flagship weekly newsletter The Outlook.

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