Stock market volatility imminent

The S&P 500 is near a 52 week high.

But what’s surprising is that less than half of all the companies that make up the index are trading above their 50 day moving average.

This is strange because you would expect most components in the index to be doing well. But instead the recent rally seems to come from just a handful of mega-cap companies related to artificial intelligence.

Because the S&P 500 is a market-cap weighted index, the larger components in the index such as Microsoft and Apple have way more influence over its movement than the smaller companies.

But if we compare it to an equal weight index of the same group of 500 stocks, we can see the two are diverging away from each other.

The orange line is the regular S&P 500, while the blue line represents the S&P 500 if each component affected the index equally.

If this bull market rally is really sustainable then I would expect to see more broad market participation and not just technology stocks climbing.

This is why I think a market pullback will likely happen over the next week or so.

The largest component of the S&P 500 is Apple stock. And it is already showing early signs of price exhaustion.

For example, the relative strength index (RSI) is a momentum indicator and it has recently peaked over 70. Whenever this happens Apple shares tend to lose value over the next few trading sessions.

The blue line is Apple’s daily stock price, and the purple line below is the RSI.  I’ve marked with gray dotted lines each time the RSI went over 70 in recent months.

Notice how the stock performed shortly after.

This doesn’t guarantee a pullback or a price reversal. But I think it might be too late to try and chase this rally.

Of course the stock market can always move unpredictably. For now though it appears to be overbought, especially for the large-cap technology stocks.

If you’re a long term, buy and hold investor, this shouldn’t impact what you do. But if you swing trade or have some play money on the side to time the market, this seems like the time to be extra cautious. 🙂

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Random Useless Fact:

Two-thirds of Canadians report being asked to tip more according to a recent poll done by the Angus Reid Institute.