September was a very narrow market.
The S&P 500 finished roughly flat, but that really does not tell you what was happening underneath the surface.
Technology was far and away the strongest sector. In fact, over the last month it was essentially the only sector that was up.
The Nasdaq held up well. The largest stocks in the S&P continued to outperform. Mega-cap technology, semiconductors, and the AI trade continued doing most of the heavy lifting.
Meanwhile, the average stock struggled.
That has led to a lot of discussion about market breadth and whether the deterioration underneath the surface is telling us that a larger market decline is coming.
It is something worth watching.
But breadth by itself is not what has me most concerned right now.
The Market Is Extremely Narrow
The percentage of stocks above their 20-day, 50-day, and 200-day moving averages remains weak.
The S&P 500 equal-weight index has also continued to underperform the regular cap-weighted S&P 500.
That means the average stock is doing considerably worse than the headline index.
But this is not a new phenomenon.
The S&P 500 is market-cap weighted. The largest stocks have an enormous influence over what the index does.
When technology, semiconductors, software, and other mega-cap growth stocks are going higher, they can pull the entire index higher even if a large percentage of the remaining stocks are struggling.
That is exactly what we have been seeing.
Declining Breadth Is Not Automatically Bearish
If I only looked at breadth, I would probably be bearish much more often than I should be.
The relative weakness of the equal-weight S&P versus the cap-weighted S&P has been developing for years.
Outside of a few periods, including the 2022 bear market and the breadth thrust following the COVID lows, this trend has been in place since roughly 2015.
So simply saying, “breadth is weak, therefore the market has to go down,” does not really work.
You have to look at what is leading.
Right now, the Nasdaq is outperforming the S&P.
Growth is outperforming value.
High-beta stocks are outperforming low-volatility stocks.
Those are still risk-on signals.
If those start breaking down, that is a different conversation.
What Actually Has My Attention
The one thing I am watching like a hawk right now is credit spreads.
Credit spreads have widened noticeably over the last couple of weeks.
For anyone unfamiliar with the term, a credit spread is essentially the additional yield investors demand to own corporate debt instead of safer Treasury securities.
When investors become more concerned about economic conditions or default risk, credit spreads tend to widen.
That makes them a useful measure of stress underneath the surface of the financial markets.
And historically, they can begin deteriorating before the stock market itself finally rolls over.
That is why I think they deserve more attention right now than breadth alone.
Looking Back at the Tech Bubble
One thing I like to do is go back through prior market cycles and see what actually happened before major tops and bottoms.
During the tech bubble, credit spreads began deteriorating before the broad stock market peaked.
Bond yields also topped before stocks.
The Nasdaq topped in March 2000, while the S&P went on to form more of a double-top pattern later.
Commodities rolled over afterward.
So the general sequence was something along the lines of:
- Credit spreads
- Bond yields
- Stocks
- Commodities
That does not mean every cycle will follow the exact same script.
But it gives us a framework.
The Financial Crisis Told a Similar Story
The financial crisis was different, but there were similarities.
Financial stocks, which were at the epicenter of that bubble, topped well before the broad market.
Credit spreads began deteriorating.
Bond yields topped.
The S&P 500 eventually made its final high in October 2007.
Commodities, particularly oil, continued moving higher for months afterward.
Oil ultimately doubled from roughly $75 a barrel to around $150 before collapsing.
Some people argue that spike in energy prices was what finally broke the consumer.
It certainly did not help.
But by that point, the leverage in the financial system was already enormous and several mortgage-related funds had already failed.
The bigger problem was already there.
2011 Was the Cycle I Remember Best
The 2011 market is probably the one I remember most clearly.
I was working at a hedge fund at the time and had already been trading for several years.
That spring, I became very bearish.
The reason was exactly the type of intermarket analysis I am discussing now.
Bond yields topped in February.
Credit spreads topped in February and began widening.
The stock market kept making new highs.
Commodities eventually topped around the same time as the stock market.
By the time the S&P attempted another rally, bonds and credit spreads were not confirming it.
That was the warning.
The market eventually dropped more than 20%.
That experience is one of the reasons I continue to look at these relationships today.
Why Intermarket Analysis Matters
No indicator is going to ring a bell at the exact top or bottom.
That is not the point.
The value of intermarket analysis is that it can give you clues about where large institutional investors are beginning to reposition.
Stocks do not operate in a vacuum.
The bond market matters.
Credit matters.
Commodities matter.
Currencies matter.
When several of these markets begin telling the same story, I pay attention.
2022 Was Different
The 2022 bear market is important because it happened in a completely different interest-rate environment.
From the early 1980s through 2021, the broad trend in interest rates was lower.
That changed.
The 2022 bear market was driven in large part by inflation and sharply rising yields.
So unlike 2000, 2007, and 2011, bond yields did not roll over before stocks.
They went straight up.
But credit spreads still deteriorated before and during the stock-market decline.
That is why I think credit spreads are especially useful in the environment we are in today.
Interest rates may behave differently than they did during the previous 40-year falling-rate regime.
Credit spreads still give us another way to measure whether stress is developing.
October Has an Interesting History
We are also entering October, which has an interesting history around major market bottoms.
The 2002 bear market bottomed in October.
The 2011 decline bottomed on October 4.
The 2022 bear market bottomed on October 13.
That does not mean October will automatically produce some major turning point this year.
But it is interesting.
I still remember October 4, 2011 very clearly.
I tried three separate times that day to get long S&P futures.
I got stopped out all three times.
I was seeing things intraday that made me think the market was trying to put in a bottom, but I kept my stops too tight and missed the first leg higher.
That is trading.
You are not going to catch every turn perfectly.
Where Things Stand Today
Now apply that same analysis to the current market.
The S&P continues grinding higher over time.
The Nasdaq is outperforming.
High beta is outperforming low volatility.
Technology continues to lead.
Breadth is terrible.
But again, breadth has been terrible for long stretches before.
The thing that stands out to me now is the recent widening in credit spreads.
That does not mean the market is about to collapse.
It may simply be a reaction to the sharp increase in Treasury yields over the last several weeks.
But it is something I want to see stabilize.
What Would Make Me More Concerned?
There are a few things that would change my view.
If credit spreads continue widening, that would concern me.
If bond yields top and start falling sharply while the S&P continues making new highs, I would pay very close attention.
If commodities begin rolling over at the same time, that would add another piece to the puzzle.
And if some of the risk-on relationships that currently remain healthy, such as Nasdaq versus the S&P and high beta versus low volatility, begin breaking down, then I would become considerably more defensive.
That would start looking more like some of the previous market cycles I discussed.
We are not there yet.
The Bottom Line
Breadth is bad.
There is no question about that.
But breadth alone is not enough for me to become broadly bearish.
We have spent much of the last decade in an environment where mega-cap technology and growth stocks have outperformed the average stock.
That can continue.
For now, I am much more interested in whether credit spreads stabilize and whether the major risk-on relationships remain intact.
My approach remains the same.
Stick with relative strength.
Own what is working.
Exercise risk management.
And pay attention when the evidence changes.
The market does not care about anyone’s opinion, including mine.
Trust the charts.
Matt Williams, CFP®
JTM Williams Capital Management
The ETFs, indexes, securities, and strategies discussed are for illustrative and educational purposes only and do not constitute a recommendation to buy or sell any security.
