As a follow-up to my last article (US Stock Market Showing Tech-Bubble Divergence), further warning signs are continuing to build that give us caution on the outlook for equities.
High yield option-adjusted spreads (OAS) are not confirming the new high in the S&P 500 and have worsened over the last three weeks.
Same deal goes for investment grade corporate bond spreads to US Treasuries:
We are also seeing some early warning signs coming from Bank of America’s Market and Liquidity Risk Indexes relative to the S&P 500. While the following chart is a bit busy, you can see at the two 2018 peaks in the S&P 500 that the BOFA indices worsened prior to the S&P 500’s peak.
They also gave an early warning prior to the S&P 500’s May peak and they are currently worsening again, potentially warning of a market pullback ahead.
We are also seeing some decent divergences between the % of S&P 500 members hitting new 52-week highs as the S&P 500 itself is hitting new highs, indicating thinning participation in the S&P 500’s rally over the last month.
Bottom-line: We are currently taking a cautious stance on the overall market outlook until these and other divergences mentioned in my last article begin to wane.