The 'S&P 493' will have to do heavy lifting for the S&P 500 to move higher
What if the Magnificent Seven are done with their bull phase? As megacap growth stocks comprise roughly 40% of the S&P 500 SPX index weight, the math becomes increasingly challenging. The rest of the market will have to do the heavy lifting in order for the S&P 500 to advance.
The odds of that scenario becoming reality is rising. The market just flashed a "Hindenburg Omen" warning. In plain English, the ominously named Hindenburg Omen occurs when a highly bifurcated market loses momentum and starts to turn down.
One Hindenburg signal can be safely ignored, but a cluster should make investors sit up and take notice. In the past 10 years, there have been 13 such clusters. Nine (pink bars) have resolved bearishly, while four (grey bars) were benign. As the chart below shows, the market has flashed another cluster of Hindenburg Omen signals for five consecutive weeks.
The odds aren't in the bulls' favor, particularly when the bifurcation is evident between megcap growth stocks, which comprise about 40% of S&P 500 weight, and the rest of the index. Absent those seven once-magnificent stocks, even if the "S&P 493" is strong it's difficult to make the math work if the Magnificent Seven significantly weaken.
The fate of the Magnificent Seven
Is the Magnificent Seven done? The jury is still out on that score. The absolute and relative performance of the Roundhill Magnificent Seven ETF MAGS shows a peak in early July, followed by weakness and a rebound and consolidation.
On one hand, the relative performance of the NASDAQ 100 NDX (black line), which serves as a proxy for large-cap growth, touched the oversold level Technically, that should be enough for these stocks to rebound.
The relative performance of the stock market's Semiconductor Index SOX, which leads the AI revolution, tells a mixed story. The good news is it recovered after testing a key relative support zone (dotted lines). The bad news is it remains in a relative downtrend (solid line).
On the other hand, FactSet reported that companies AI on their earnings calls have peaked. Is this an indication of peak AI frenzy?
Good news - for the bears
The market is now discounting two consecutive half-point cuts at the next two Fed meetings, which may be an overly ambitious expectation.
Here's more bearish news. Equity risk appetite indicators are also exhibiting negative divergences. In particular, global cyclical indicators, as measured by the copper/gold and base metals/gold ratios, are weakening. Just remember that any weakness should be just a blip. The S&P 500 remains in a long-term uptrend.
The investment highlight of the coming week will be the FOMC decision. The hotter than expected CPI and PPI reports cemented expectations of a quarter-point rate cut at the September meeting. However, the market is now discounting two consecutive half-point cuts at the next two meetings, which may be an overly ambitious expectation.
The Fed hates surprising the markets. Watch the Summary of Economic Projections (SEP) for the dot plot projections, as well as expected rates of economic growth, inflation and unemployment. If the Fed were to correct the market, that's where the correction will be most evident.
Given these conditions, I expect market sloppiness for September and possibly October. That said, investors should regard any near-term weakness as a buying opportunity. Pullbacks are normal at this point of an election year, and I expect higher stock prices by year-end.
Cam Hui writes the investment blog Humble Student of the Markets, where this article first appeared. He is a former equity portfolio manager and sell-side analyst.
More: Fed interest-rate cuts could boost stocks, or sink them. Here's what history says.
Also read: Bets on a big Fed rate cut just won't die. What stock-market investors need to know.
-Cam Hui
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