Over the last two months, roughly since the collapse of Silicon Valley Bank, there has been a noticeable bias toward growth stocks. Over the trailing 60 days (through 5/10), the SPDR S&P 500 Growth ETF (SPYG) has gained 9.17%, more than doubling the performance of the SPDR S&P 500 Value ETF (SPYV). The bias towards growth has also extended to small caps as the iShares Russell 2000 Growth ETF (IWO) has gained 2.65%, while the iShares Russell 2000 Value ETF (IWN) is down -2.48% over the same period.

While the recent leadership by growth and improvement from offensive sectors are positive signs for the market, not every signal has been positive. There has been a lack of breadth in the market recently. While the S&P 500 (SPX) has gained 7.15% over the last two months, the S&P 500 Equal Weight Index (SPXEWI) has lagged by more than 5%, returning just under 1.5%. While the equal-weight index has vastly underperformed its cap-weighted counterpart, the Invesco S&P 500 Top 50 ETF (XLG), composed of the 50 largest stocks in the index, has gained 11.74% over the last two months, illustrating how the upside has been concentrated in the largest stocks.

The contradicting themes in the market – the offensive tilt suggested by the outperformance of growth and relative strength gains by offensive sectors versus the lack of upside participation outside of mega-cap names may help to explain why the market has been relatively stagnant in recent weeks. After rebounding from its March low, the S&P 500 stayed within a 121-point range from 4049 to 4170 in April, less than half of the second-narrowest monthly range for the index over the last 12 months. The U.S. bond market has also remained relatively rangebound recently as the U.S. Treasury 10-year Yield Index (TNX) has remained between 3.3% and 3.6% since late March.

At this point, it seems clear that the market is undergoing a period of consolidation. It appeared as if the S&P 500 was breaking out of its April range when it broke a triple spread top at 4180 on May 1 and quickly reversed and fell to the bottom of its range, reaching 4060 before reversing up again. A second consecutive buy signal, which would come with a spread triple top breakout at 4200, would help to confirm that SPX is breaking out to the upside, while a move to 4040 would be an initial signal of a break to the downside. There are no definite answers to what is driving this consolidation period. The fact that bonds have seen a similar period of rangebound trading suggests that the cause is not something unique to equities.

From an economic perspective, there is significant uncertainty – will the Fed raise rates again? Will the debt ceiling impasse be resolved? Is the U.S. economy headed for a recession? So, it seems plausible that many investors may wait for more clarity before investing. Whatever the cause, we would do well to keep an eye on our indicators, as periods of consolidation are often followed by large breakouts.

05/12/2023

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