Risks lurk under stocks’ calm performance

The recent easing in stock market volatility, as indicated by the downward trend of the CBOE Volatility Index (VIX), may be perplexing or frustrating to some investors, depending on their views. Given the macroeconomic backdrop, the market’s calm spell (although with a slow climb) may seem puzzling, but it looks like what traders call a “coiled spring.” A coiled-spring market has a high potential for solid movement in one direction after a long stagnant spell or a significant shift in the opposite direction. And the S&P 500® Index’s narrow trading range between 3800-4200 seems stale for some time.

In contrast, the current surge in the NASDAQ® Composite Index raises concerns about the long-term sustainability of the tech-driven rally. As of year-to-date, the Nasdaq has outpaced the Dow Jones Industrial Average® Index by approximately 20%, the most significant gap in performance between the two indexes in over 30 years. Likewise, the Nasdaq has outperformed the S&P 500 by about 11% year-to-date. However, just a few stocks – primarily the technology behemoths most investors are familiar with – are powering these returns. That’s problematic and, like a coiled spring, creates the potential for a negative reversal in the Nasdaq.

This limited leadership in performance and the lack of market breadth have defined the stock market in 2023 thus far. While the headlines trumpet tech-driven index returns, something else is happening beneath the surface. For example, as of May 16, the Nasdaq had gone 50 consecutive days with more new lows than new highs. Despite this, the NASDAQ 100® Index (which tracks the 100 most significant Nasdaq stocks) finished higher that day, and the S&P 500 Tech sector closed at its highest level relative to the S&P 500 since March 2000.

It’s a bifurcated market, and investors should pay attention to the underlying factors driving the market’s upward trends and the indicators countering the prevailing narrative. Investors can benefit from these technical insights to make informed allocation decisions and position their portfolios for the market’s future direction.