Why Chart Watchers Are Skeptical of S&P 500’s New Record

There are soldiers and there are generals in the stock market, according to Oppenheimer & Co.’s Ari Wald, and they need to march together for this army to keep winning.

The large-cap generals are marching just fine, as shown by the records reached yesterday in the Standard & Poor’s 500 Index and Dow Jones Industrial Average.

The soldiers, however, have been loafing around worse than Beetle Bailey for the last two months. While they’ve made a mad dash to catch up, there’s a lot of ground left to cover: The Russell 2000 Index has jumped 3.3 percent in the past two days yet is still more than 6 percent lower than its March record. To Wald, this small-cap bounce will likely just delay and deepen what he sees as an inevitable downward correction in the S&P 500.

Not to rain on anyone’s parade, but there are reasons why champagne corks weren’t popping when the S&P 500 closed at a record for the first time since April 2 yesterday. Here are a few of them, presented in bullet-point form to extend this military metaphor way past its logical retirement age:

•Breadth. This is another way to measure the soldiers and the generals. Only 10 percent of S&P 500 companies set new 52-week highs yesterday, about the same amount as the last record on April 2. By comparison, the percentage peaked at 39 percent on May 15 of last year, when it was frequently above 20 percent. The figure hasn’t been above 20 percent at all in 2014.

Canaries, Mines

•Valuations. At 17.4 times trailing earnings, the S&P 500’s P/E is at a four-year high, though not anywhere near a multiple that reeks of a bubble. However, the last bear market started after the index peaked at only 17.5 times earnings in October 2007. So that number is noteworthy.

•Sector Rotation. Another 2007 flashback. Financial stocks were the “canary in the coal mine in 2007” when they peaked well before the broader market, according to Jonathan Krinsky, chief market technician at MKM Partners. Relative to the entire S&P 500, financial shares peaked in July. While not as pronounced as the dawn of the banking crisis, it’s still “not a constructive sign” in Krinsky’s view. Neither is a peak in consumer-discretionary shares -- or relative strength in energy stocks, which he said usually happens toward the end of bull markets.

•Volume. Total trading of listed U.S. stocks was less than 5.8 billion shares on each of the last two days. That’s 15 percent below the 2014 average and ranks them among the six quietest sessions of the year. Not a lot of investors are lining the streets to cheer on this army’s parade.

Options, Bonds

•Options expiration. Equity and index options expire this week, which can often result in funky, counter-intuitive price moves.

•Bond signals. Ten-year Treasury yields, currently at about 2.61 percent, are much closer to their lows of the year (2.58 percent) than their highs (2.99 percent). This may be a reaction to European bond markets getting all jacked up on bets of stimulus from the central bank. Or it could lack of faith in economic growth. Either way, “relative performance versus bonds will need to reverse its downtrend to confirm the move in stocks,” RBC Capital Markets LLC technical analyst Robert Sluymer wrote in a report today.

As of 10 a.m. today in New York, the Russell 2000 was little changed. As Bill Murray said while playing a private in “Stripes:” “I know that I’m speaking for the entire platoon when I say this run should be postponed until this platoon is better rested.”

Before it's here, it's on the Bloomberg Terminal.