From the eye test to the smell test

The stock market has a big weight on its shoulders. The mega-cap stocks are weak again and that is weighing on the equity futures market.

Currently, the S&P 500 futures are down 14 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 63 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 92 points and are trading 0.3% below fair value.

The mega-cap malaise follows what has been an extraordinary run since late October and, really, all year.

There will be periods like this when a profit-taking inclination kicks in, and when there are, it will be challenging for the major indices to pass the eye test. The question is, can they pass the smell test?

The smell test incorporates the rest of the market and how it does when the mega-cap stocks aren’t doing so well. The rest of the market did just fine yesterday when the mega-cap stocks did not. One could see the rotation in the air, and also smell it.

To that end, the market-cap weighted S&P 500 declined 0.5% on Monday, but the equal-weighted S&P 500 managed a fractional gain.

There is a feeling of thickness in the air today, however, with market participants questioning if stocks in general can keep running like they have. The Equal-Weighted S&P 500 Index has had a parabolic move of its own, surging 12.6% from its October 27 low.

Investor sentiment readings skewing strongly to the bullish side of things have created a bit of a contrarian headwind. The news that Moody’s cut China’s credit outlook to Negative from Stable, due in part to concerns about structurally weaker growth prospects, has also tempered some of the buying interest this morning along with the impending release of the ISM Non-Manufacturing PMI for November (Briefing.com consensus 52.4%; prior 51.8%) and the JOLTS – Job Openings Report for October (Prior 9.553 million) at 10:00 a.m. ET.

Treasury yields are sliding in front of those reports. The 2-yr note yield is down four basis points to 4.61% and the 10-yr note yield is down seven basis points to 4.21%. These lower yields pass the eye test as a good thing, but whether they pass the smell test is another question. If they are moving lower on growth concerns, that will inevitably invite concerns about earnings prospects.

That doesn’t seem to be the prevailing case at the moment, but it is something to keep an eye on and to have a nose for.

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Originally Posted December 5, 2023 – From the eye test to the smell test