August 26, 2024
Right now, the stock market has an eerie similarity to the summer of 2023. The S&P 500 index was up 16% in 2023’s first half as it climbed out of a bear market. Things were looking good until the end of July, when stocks fell 10% in three months. It was the first correction that year, and all 11 market sectors were in the red.
This year is playing out similarly.
The S&P 500 rose 15% in the first half of 2024. But now there’s a divergence in the market – the average stock is struggling while the market hits new highs.
Typically, when the S&P 500 breaks out, most stocks in the index also do well. This represents a healthy market. What’s rare is when the S&P 500 climbs but the average stock falls. That’s exactly what’s happening today.
We can see this through the McClellan Advance-Decline U.S. Summation Index, which is a rolling tally showing if stocks in the S&P 500 advance or decline. It uses a moving average of the advancing stocks and subtracts a moving average of the declining stocks, then adds that figure to the previous day’s close. Put simply, if more stocks rise, the number at the end of the day is positive and the index goes up. If more stocks fall, the number is negative and the index declines.
This index usually falls in line with the S&P 500. When the benchmark index is breaking out, this index tends to follow. But not today. The summation index is down as the S&P 500 hits new highs. This occurred just a couple times over the past few years, most recently in 2023.
The summation index fell quickly while stocks climbed higher into June. Though the market couldn’t keep climbing for long. It rose more through July, but then started to fall because there was no underlying growth support. The pressure of fewer stocks going up eventually tipped the scale.
Another recent case was in the summer of 2021. The S&P 500 rose 14% in the first six months of that year. But by summer, more stocks were falling than rising. While it wasn’t a major drop in breadth, the divergence was clear. The S&P 500 didn’t fall right away. It rose another 5.6% through early September before falling 5% in a month.
The S&P 500 has been climbing almost all year, with just one 5% pullback so far. While we can’t know the exact timing, there will be another bump in the road. The summation index shows we’re likely getting closer to that next pullback.