As the S&P 500 continues to churn around below its all-time highs from January, we are beginning to see short-term breadth readings start to weaken.  While strong breadth is always preferable to weak breadth, given the declines we have seen in price, it should come as no surprise that the number of industry groups with rising 50-day moving averages (DMA) and the number trading above their 50-DMAs has also declined.

Starting with the percentage of industry groups above their 50-DMA, after falling down close to zero in early February, it has rebounded some but still remains below a third at 29.4%. You may recall that prior to Monday’s rally, this reading was considerably lower at just 16.7%.

The longer industry groups trade below their 50-days, the more likely it is that the direction of their 50-DMAs will start to turn lower as well. As shown in the chart below, just 37.5% of S&P 500 industry groups have rising 50-DMAs.  The last time the reading was this low was late last summer, and before that, you would need to go back to right before the 2016 election.  Investors have certainly become a bit antsier over the last few weeks, and given that it has been pretty uncommon over the last two years to see so many industry groups with falling 50-DMAs, that sense of unease is understandable.

The table below lists the YTD performance of all 24 S&P 500 industry groups along with where they are trading relative to their 50-DMAs.  Given the year is still young, the fact that the best performers YTD are the furthest above their 50-DMA (and vice versa) shouldn’t come as much of a surprise.  Leading the way higher this year, the Retailing Industry Group has been the best performer with a YTD gain of over 15%!  The performance of this group, however, is completely misleading.  While a number of traditional brick and mortar retailers are up on the year, the bulk of the group’s gains have come from Amazon (AMZN), Netflix (NFLX), and Booking (formerly Priceline), which are up 32%, 67%, and 20% YTD, respectively.  The average return of the traditional brick and mortar retailers in the group is actually a decline of 0.4% YTD.

Behind retailing, the other Industry Groups that are furthest above their 50-DMAs are all tech related with Semis, Tech Hardware, and Software & Services all at least 2.4% above their 50-DMAs.

On the downside, it’s already been a rough year for Autos & Auto Parts, Energy, and Food & Staples Retail, which are all more than 5% below their 50-DMAs. So while tech stocks have been driving the market’s gains (what else is new), there really hasn’t been a dominant theme behind the groups that are furthest below their 50-DMAs.

One of the breadth measures we follow closely is the percentage of S&P 500 industry groups trading above their 50-day and 200-day moving averages.  (These are two indicators we feature often for Bespoke subscribers.)  As shown below, the percentage of industry groups now trading above their 200-day moving averages has dipped down to 54.2%, so it’s getting very close to the 50% reading that is often viewed as a line of demarcation of sorts for a market that’s trending higher or trending lower.

The percentage of industry groups trading above their 50-day moving averages has dipped all the way down to 16.7%, and it was actually much lower at the recent lows in early February.  This speaks to the extreme near-term weakness that the market has experienced over the last month and a half.

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We were reminded of an EKG when we made the chart below.  The chart shows the S&P 500’s daily percentage change going back to 2017.

Aside from a few skips here and there, the market’s “EKG” looked pretty stable throughout 2017.  Since early 2018, however, things have gone haywire, with violent daily moves in both directions.

If the market is the patient, who/what is the cause of the stress, and who/what is the doctor that can resolve the problem?  Your average investor watching from the sidelines is like the nervous family member watching closely in the waiting room.

There are any number of ways you can answer the questions above.  Rising interest rates, valuations, the short-vol trade, over-heating, inflation, and now tariffs are all possible answers as to the cause.  Or maybe it’s just old age.  As to how the stress gets resolved, if the main doctor is the Fed, they’ve got quite the predicament on their hands since they’re also a potential cause of the stress.

We’ll stop here before going even further down this metaphorical rabbit hole.  The bottom line is that daily volatility has picked up quite significantly from where it stood throughout 2017, and at this point the only remedy might be time.

After climbing to a twelve-year high in January, the ISM Non-Manufacturing report dipped a bit in February but still managed to beat expectations.  While economists were forecasting the headline index to fall from 59.9 down to 59.0, the actual decline was less than half of that to 59.5.  Outside of last month’s report and the one in October 2017, this month’s would have been the best reading since August 2005.  On a combined basis, accounting for each sector’s share of the overall economy, the February ISM came in at 59.6, which was a slight decline from January, but still right near multi-year highs.

As far as the internals of the report were concerned, it was also a pretty solid report.  On both a m/m and y/y basis, more sub-indices were up than down.  New Orders were particularly strong as that index rose to its highest levels since January 2006.  On the downside, the Employment component saw its largest m/m decline since February 2014.  While that doesn’t bode particularly well for Friday’s Non-Farm Payrolls report, we would note that in January the index had a pretty big jump, so this month’s pullback is probably just a reversion to the mean type of move.  Furthermore, back in February 2014 when we last saw a similar one-month decline, the corresponding Non-Farm Payrolls report actually came in stronger than expected.  One encouraging aspect of the report was the Prices Paid component, which actually showed a slight decline relative to January.

While the Prices Paid component of this month’s report declined, like the ISM Manufacturing report last week, there are still plenty of whiffs of inflation in it.  As shown below, in the commentary section of this month’s report, there were still more than a couple of mentions of rising prices and higher costs.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

Economics

When the Story Changes, Be Alert by Bill McBride (Calculated Risk)

A compelling case that the generally stable US economic backdrop is shifting somewhat after years of catalyst free recovery from the last recession. [Link]

Why governments have overestimated the economic returns of higher education (The Economist)

Historically workers with degrees have earned a substantial wage premium, but there’s some evidence that this won’t be true in the future and investments in education are overrated. [Link]

Dystopia

Palantir Has Secretly Been Using New Orleans To Test Its Predictive Policing Technology by Ali Winston (The Verge)

The New Orleans Police Department is using algorithms which draw data from criminal records, ties to other gang members, and social media to predict criminal behavior; but that predictive policing approach isn’t disclosed to defendants as part of their trials. [Link]

Live by the algorithm, die by the algorithm: How LittleThings went from social publishing darling to shutting down by Luicia Moses (Digiday)

Small tweaks to algorithms can have huge real-world consequences for publishing companies and consumers of media. [Link]

Big Tech

Why We May Soon Be Living in Alexa’s World by Farhad Manjoo (NYT)

A review of how embedded Alexa is becoming in households and lives, with sales running in the tens of millions for the sprawling universe of voice-activated devices. [Link; soft paywall]

Checking in With Alphabet Chair John Hennessy by Tekla S. Perry (IEEE Spectrum)

Unsurprisingly, Hennessy thinks “it’s not technology that has created the rifts in our communities”, and that focus on doing the right thing at Google is “more than just avoiding evil”.  [Link]

New Approaches

By mass-texting local residents, Outlier Media connects low-income news consumers to useful, personalized data by Christine Schmidt (Nieman Lab)

A Detroit media company is taking “service journalism” to new heights, but aiming at lower income citizens. The new model reads very, very differently from new digital journalism offerings that have sprouted up over the last few years. [Link]

Real Estate

Rising mortgage rates hit new home sales hard, an ominous sign for builders by Diana Olick (CNBC)

Low inventories, high prices, and now rising mortgage rates have made the outlook for new home sales activity less positive than it was a relatively short time ago. [Link; auto-playing video]

Equality

Tammy Duckworth faces predicament in Senate over maternity leave by Emily Tillett (CBS)

Illinois Senator Duckworth is due in April and will become the first sitting US Senator to give birth when her new daughter arrives. In the stuffy world of the US Senate, where children aren’t allowed on the floor and maternity leave doesn’t exist, that will create some issues. [Link; auto-playing video]

Report: No progress for African Americans on homeownership, unemployment and incarceration in 50 years by Tracy Jan (WaPo)

Higher unemployment, lower homeownership, much higher incarceration rates, much less wealth, lower income at similar levels of education and age, and little progress on all of these headwinds are a brutal laundry list of policy failure when it comes to the African American community. [Link; soft paywall]

Consumer Nightmares

How Defective Guns Became the Only Product That Can’t Be Recalled by Michael Smith and Polly Mosendz (Bloomberg)

What happens when a gun doesn’t work the way it’s supposed to? Unlike other products, basic consumer protections like recalls are simply not an option, and that can have deadly consequences. [Link]

Crypto

Cryptocurrency Firms Targeted in SEC Probe by Jean Eaglesham and Paul Vigna (WSJ)

This week the SEC issued dozens of subpoenas and requests for information to companies that had issued cryptocurrencies or tokens, in a sweeping regulatory action that moves to bring the space into compliance with US law by hook or by crook. [Link; paywall]

History

The Economics of the Civil War by Roger L. Ransom (EH.net)

A data-intensive review of the causes, consequences, and costs of the Civil War from an economic perspective. [Link]

Tangled Webs

HNA via GAR? The mystery of Deutsche Bank’s largest shareholder by Robert Smith (FTAV)

Answering the question “Who owns the biggest chunk of Germany’s largest bank” is anything but straightforward. [Link; registration required]

High Yield

Marxism Has Cornered the Junk-Bond Market by Jim Bianco (Bloomberg View)

A rising share of the corporate bond market is captured in passive flows from ETFs and other index vehicles, presenting challenges for the market. [Link]

Health Care

What might the Amazon, Berkshire and JP Morgan health care joint venture actually do? by Tren Griffin (25iq)

Speculation on what might be in store for the non-profit joint venture between three of the largest American corporations. [Link]

Star Wars

We Dare You To Explain Luke’s Plan To Rescue Han In ‘Return of the Jedi’ by Mike Ryan (Uproxx)

Even if things went well, which they did not, Luke’s plan to get Han back from Jabba the Hutt was a complete non-starter, with nonsensical goals, terrible strategy, and absurdly bad execution. [Link]

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Have a great Sunday!