The NASDAQ 100 had a close to a 52-week high but failed to catch up fully; it is lagging technology sector performance. This means that the market is changing, with technology, which has long been a leader, suddenly playing second fiddle to other sectors.
Small-cap stocks, in the form of the Russell 2000 (IWM), and equal-weight indices like RSP are joining the party and hitting their respective all-time highs. It indicates broad market participation that characterizes the health and sustainability of the current rally in contrast to earlier when the gains were concentrated in a few mega-cap stocks.
One of the most encouraging signs of this rally is the breadth of participation. Equal-weight indices are outperforming their market-cap-weighted counterparts, a phenomenon that often indicates a robust market foundation.
This broad participation is a departure from earlier trends, where gains were driven by a narrow set of high-performing stocks.
The expansion of market leadership to smaller companies and a more balanced contribution across sectors bodes well for the equity market. Such breadth has historically been a leading indicator of sustained rallies that continue to propel equities ahead of the year end.
Sectoral Shifts and Market Sentiment
The gap of equities is widening. However, the latest quarterly earnings reported by retailers indicate that this gap between leaders and under-performing companies will need to be watched as the year runs its course.
The much-awaited non-farm payroll data also assumes importance here. After all, not much pleasing was done in October; the hurricanes partially explain what happened then, but this November report needs to present a much better picture.
High-yield bonds have also hit new 52-week highs as investors’ risk appetite grows.
The VIX volatility index dropped to a six-month low of 13.5%, and market fears are seemingly dissipating, thereby creating a positive equities environment.
Bond Yields and the Dollar Index: Shaping the Risk Environment
Risk-on sentiment has also been boosted recently by the decline in 10-year bond yields to below 4.2% from 4.5%. This drop, combined with the 10-year yield rallying above its 50-day moving average, has helped to underpin recent strength in equities.
Lower yields reduce borrowing costs, so equities are more appealing compared to fixed-income investments.
Meanwhile, the dollar index remains within a tight range of 106-107.
The index may break below 106 levels and will be able to trigger short position opportunities in the dollar, which is beneficial for global equities and commodities.
Commodities: Consolidation and Outlook
Gold
After a stellar year that saw gold prices surge from $2,000 to $2,800, the precious metal is now consolidating around its 50-day moving average.
While short-term consolidation is expected, the overall outlook for gold remains positive, supported by strong demand and a weaker dollar.
Oil
Oil prices have been flailing near the 52-week lows while trading in a narrow range between $67 and $72.
Despite OPEC’s persistent discussions about potential supply cuts, soft demand continues weighing on oil prices.
Such stagnation may drag energy stocks down after having enjoyed a notable rally recently.
Growth vs. Value and Commodities Landscape
Growth stocks have so far kept a slight lead over value stocks in this market environment.
Commodities like gold and silver are trading in defined ranges, which depicts moderate investor sentiment.
It is the balance between growth and value that shows there is a tug-of-war between the different market forces.
Important Takeaways and Insights
- Leadership of S&P 500: The fact that S&P 500 has reached new highs proves that it is a leader in the market, based on solid participation across sectors.
- Small-Cap Strength: Small caps and equal-weight indices reaching new highs reflect a more broad-based base for the rally, which is different from concentrated gains.
- Economic Data’s Role: Non-farm payroll data and other economic indicators will be important in shaping sentiment as we enter the final stretch of the year.
- High-Yield Bonds as a Signal: The breakout in high-yield bonds to 52-week highs is a bullish signal, reflecting increased confidence among investors.
- Commodities and Currencies: Gold continues to be the long-term favorite, though oil suffers from weak demand. Next moves in the dollar index can shake up global markets.
- Bond Yield Trends: Declines in 10-year yields support a risk-on environment, making way for equities to climb higher from here.
Conclusion: An Optimistic View for Equities
It would be healthy if equity rallies continue to broaden with the year-end approaching.
All-time highs for S&P 500 combined with robust performance in small-cap and equal-weight indexes indicate a level of widespread investor confidence, though sectors such as technology are lagging.
In any case, this is a pretty bullish breadth indicator for the markets.
With non-farm payroll data on the horizon and the economy continuing to evolve, vigilance is required.
However, the decline in bond yields, low market volatility, and strong participation across sectors suggest that equities are well-positioned to continue their upward trajectory.
As markets consolidate gains and await fresh catalysts, the stage is set for a strong finish to the year.