The Trading Range

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

May has been a good recovery month for equity markets since the April correction. The S&P 500 Index (SPX) is up +5.50% MTD, and briefly went into all-time high territory last week. Last week’s push was fueled by positive quarterly earnings reports from a few of the largest capitalization companies. The S&P 500 Equal Weighted Index (SPXEW), which does not favor a company’s impact by how large it is, did not go into all-time high territory last week, and is up +2.23% MTD. The performance disparity between these two indexes is even more pronounced year-to-date, with the SPX up +11.88% YTD, and the SPXEW up +4.95% YTD.

The S&P 400 MidCap Index (MID) is up +3.48% MTD, and is now up +6.93% YTD. The S&P 600 SmallCap Index (SML) is up +3.92% MTD, but only up +0.50% YTD. While both small cap and mid cap equities bounced nicely in May, differences in their year-to-date performance are more distinct. Small cap equities have become conspicuous by their absence. This may be in part because interest rates have remained high, which can have a greater impact on smaller companies. Still, from a technical perspective it does appear that large, mid and small cap equities are settling into trading ranges.

Trading ranges are common this time of year. Year-end and first quarter earnings are on the books. The year-end rally and subsequent correction are on the books. Schools are out with vacation plans aplenty. Equity markets have historically had a tendency to take ‘summertime vacations’ before they ramp up for third quarter earnings season. Plus, there promises to be plenty of action later in this rather unique-yet-just-the-same election season later in the year. We certainly don’t want to miss that show.

The utilities sector surprisingly has taken center stage in May. The S&P 500 Utilities Index is up +13.77% MTD. This traditionally defensive sector had been lagging, but is now up +7.04% YTD. While credit must be given to portfolio rebalancing activity, this may also be a harbinger of institutional prep for a bumpy summer. The S&P Composite Semiconductors Index is up +11.01% MTD and up +11.07% YTD, indicating that it, too, was the subject of portfolio rebalancing. The S&P Composite Energy Index is down -1.04% in May, yet still up +11.51% YTD, also a potential subject of rebalancing.

Bond Markets have gained in May but are still ‘off-schedule’ for the year. The Federal Reserve has made the declaration that they are data-driven, yet they are operating under unique conditions. This implies that they are indeed in the position of dictating policy rather than simply reacting to the economy. It’s a new role, with unclear implications, and unknown consequences. Inflation numbers are now a central focus for the Federal Reserve as they map out their actions for future interest rate reductions. An election year brings additional pressure to the role, as the Federal Reserve works to preserve the integrity of their new mission while not getting wrapped up in the politics.  

Trading range markets are not necessarily quiet markets. In fact, equities constrained by trading ranges may be much more reactive to current news events, or small moves in the bond market, or bumps in the night. Algo-trading is still alive and well, along with the potential for daily, or even hourly buy and sell programs, as we have seen lately. While daily volatility can appear to be high, the Volatility Index (VIX) has been trading at historically low levels. The implication is that institutional investors are staying the course and continue to believe in our current long-term Bull Market for equities.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2024 Edward D. Foy.  [email protected],

Sources: StockCharts, Morningstar, Stock Trader’s Almanac.