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Caution is Warranted When Leadership Is Thin

The best stock market rallies occur when the leadership is broad based. When many industry groups participate in a rally it is always a sign of a very strong market. This is easily visible when many beaten down sectors start to catch a bid and the participation in these sectors begins to broaden. In April and May 2020 there was money leaving many leading technology stocks going into beaten up areas such as retail (XRT), energy (XLE), financial (XLF) and even the transports (IYT). That led to a very powerful expansion in the markets.

The month of June has certainly been a much tougher period for the major stock indexes. In fact, the NASDAQ 100 (QQQ) has been the real strength in the markets. While this is not a bad thing it is also not a good thing either when it leads by itself. When the leadership in the market declines to just a couple dozen leading names it is a time to reevaluate what’s really taking place. Now please understand, the tech heavy NASDAQ and NASDAQ 100 have been making new all time highs, but the other indexes have not. Technology has been the clear winner, but this is not really sustainable for the other market indexes to have money just flow into the popular large cap tech names.

Leadership is going to need to broaden into other areas soon if this current up-trend in the major stock market indexes is going to hold up. In my opinion, the Russell 2000 (IWM) must be watched and followed very closely at this time. The Russell 2000 (IWM) represents small cap businesses in the United States. If this index starts to perk up then it would be a very positive sign for the markets going forward. At this time, the Russell 2000 Index (IWM) is still down about 15.0% this year. Should the Russell 2000 Index (IWM) start to catch a bid and show some leadership then it would be a good indication that the major stocks indexes as a whole have a lot further to run. Unfortunately, the leadership is thin right now and that is a time when caution is warranted.

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