Former Bear Sees A Potential Problem For Stocks

The outlook for US equities remains constructive, but a veritable collapse in a key measure of market breadth should give bulls pause.

That was the overarching message from Morgan Stanley’s Mike Wilson on Monday.

Wilson, long known as the voice of healthy skepticism among a community of credulous Pollyannas, shed the permabear bear label in recent years. That’s probably for the best, even if it’s meant Mike getting less publicity. He was never a bear in the sense that SocGen’s Albert Edwards is a bear, and trying to play that role is to incur significant career risk as a chief equity strategist at a major Wall Street bank.

Anyway, Wilson pointed on Monday to a chasmic gap between the share of S&P 500 stocks trading above their 200-day moving average and the overall index as a share of its own 200-day.

There’s the chart. Wilson’s annotations speak for themselves, but just in case: Breadth has collapsed since Kevin Warsh’s “I’m a tough guy, I swear,” Jackson Hole speech, while cap-weighted equities (i.e., the index) have exhibited no such detachment from their own moving average.

In the color accompanying the chart, Wilson was keen to note that breadth was “still expanding as crude and yields moved higher” earlier in the summer, which makes it seem like the abrupt deterioration “is more about additional [policy] tightening being discounted” than it is about long-end Treasury yields or oil prices rising.

Although Mike remains confident that stocks can recover any joie de vivre lost to the Fed’s hawkish pivot, he emphasized on Monday that the divergence between breadth and the index “needs to reconcile before the bull market fully resumes.”

The deciding factor for how that reconciliation plays out is rates vol which, as discussed here, is alive and kicking. “The near-term question for equity investors,” Wilson said, “is whether this spills over to equity vol, which has remained remarkably calm during this recent breakdown in breadth and valuations.”