Bullish Signs Of The S&P 500 Rally Broadening Beyond Tech

If You Want The S&P 500 To Go Up…

In a May 18 debt ceiling article, we noted the S&P 500's (SP500) chart had been improving in recent weeks, telling us to keep an open mind about better than expected outcomes.

One concern earlier in 2023 was the S&P 500's gains were largely based on the tech sector. Since one-trick pony market moves are less confidence-inspiring, you would prefer to see more stocks participating in the gains if you want the S&P 500 to have a sustained rally.

Rally Continues to Broaden Out

As we have noted numerous times recently via the CCM Twitter Feed, there are numerous forms of evidence telling us to remain open to a broader and healthier rally in the U.S. stock market.

For example, the Dow Jones Composite Average has a constructive convergence of trends look, which means market participants on numerous timeframes are feeling more confident about the U.S. economy and corporate earnings. Compare and contrast the rollover look in H1 2022 to the turning-up look in 2023.

The Dow Jones Composite Average is composed of large and well-known U.S. companies. It contains all component companies of the Dow Jones Industrial Average, the Dow Jones Transportation Average, and the Dow Jones Utility Average. As shown below, the index only has 10.8% exposure to Information Technology (XLK) stocks. That is good news for the sustainability of the rally in all S&P 500-related ETFs, including SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the Vanguard 500 Index Fund (VOO), and the iShares Core S&P 500 ETF (IVV). It is also good news for holders of the Vanguard S&P 500 Index mutual fund (VFINX).

There Is Comfort In Numbers

The S&P Composite 1500 (SPTM) combines the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, to cover approximately 90% of U.S. market capitalization. It is designed for investors seeking to replicate the performance of the U.S. equity market or benchmark against a representative universe of tradable stocks. The S&P 1500's weekly chart below had a concerning rollover look in 2022; it now has a constructive turning-up look, which speaks to improving probabilities for the S&P 500 Index and the entire U.S. equity market.

Since the S&P 1500 contains the stocks in the S&P MidCap 400 and the S&P SmallCap 600, the chart speaks to improving odds for the SPDR S&P MIDCAP 400 ETF Trust (MDY) and the iShares Russell 2000 ETF (IWM).

Other S&P 500 Sectors Coming To Life

Broad stock market rallies speak to more widespread confidence in future economic and market outcomes. SPY is based on the standard weight S&P 500 Index. The Invesco S&P 500 Equal Weight ETF (RSP) is based on the S&P 500 Equal Weight Index, which equally weights the stocks in the S&P 500 Index. As you can see in the table below, RSP is less dependent on the Information Technology sector and the Communication Services sector (XLC).

The 250-day moving average is shown in black on the RSP chart below. Notice how the 250-day has improved since January 2023 by flattening out and turning up, indicative of incremental improvement in the long-term trend and expectations about future economic and market outcomes.

XLY Moved After A Similar Setup

The chart below of the Consumer Discretionary Select Sector SPDR ETF (XLY) was shown several weeks ago, noting it was a good candidate for the stock market rally to see broader participation. XLY closed at $151.97 on May 26. XLY responded to the constructive setup below that is similar to the RSP setup shown above; XLY closed on July 11 at $171.31.

New Highs and New Lows

The topic of new 52-week highs relative to new 52-week lows has been covered in our weekly videos for several months. The data from Tuesday's session via The Wall Street Journal also aligns with the theory that the rally is broadening out and looking more sustainable.

What Does Long-Term Mean?

Our analysis speaks to stock market odds looking out months and years, not the next five minutes, the next five days, or even the next five weeks. A recent study of a rare monthly bullish NASDAQ momentum flip provides some historical context. The NASDAQ nailed down a bullish monthly momentum PPO cross at the end of June. Since this article is primarily about the S&P 500, the table shows subsequent S&P 500 performance following similar signals.

The Evidence Has Been Improving

In a criminal case, jurors want to see the weight of the evidence evolve over the course of the trial. Weight of the evidence approach works in a similar manner when assessing the evolving risk-reward profile of the S&P 500. As shown below via the topics covered between May 18 and July 11, the weight of the evidence has clearly evolved along a bullish path:

Debt Ceiling - Market Does Not Look That Bad.

S&P Profile - Looks More Like Bullish Periods vs. Bearish Periods.

Sector Strength - Better Than Most Believe.

Stocks vs. Bonds - Bullish Look.

Multiple Timeframes - Converging In Bullish Manner.

Volume - Institutions Are In No Rush To Sell.

Recession - Charts Not Screaming Economic Contraction.

Long-Term Odds - Secular Trend Look.

Short-Term Concerns

Recent constructive developments speak to longer-term odds. Just as stocks rallied in October on the belief future inflation reports would improve, it is possible stocks could falter in the short-to-intermediate term on the belief that Wednesday's CPI report is the peak of good news on inflation (future reports could still show sticky inflation).

Numerous areas of the market have near-vertical charts and sentiment is no longer in the constructively skeptical range. Thus, we need to maintain realistic expectations about how markets operate in the real world. Even if good things are going to happen in the coming years, all bullish trends have normal-and-to-be-expected countertrend moves (corrections, givebacks, and volatility).

The longer-term setups are unquestionably favorable and the evolution of the weight of the evidence aligns with increasingly better odds for long-term investors.