Willie Delwiche on Equal-Weighted Indices and Sentiment

One of my favorite commentary pieces to read are those from Willie Delwiche, a strategist with Baird. I have always felt that he puts out some of the most straight-forward depictions of what is going on in multiple asset classes, and his latest report did not disappoint.

In particular, Willie chose to focus on the Equal-Weight S&P 500 and the sentiment we are seeing from fund managers. One of his key takeaways is the Relative strength from equal-weight indexes and an expansion in the percentage of stocks above their 200-day average point to encouragingly broad rally participation. Both of these are constructive for intermediate- and long-term time frames. As we can see in the chart below, the equal-weighted S&P 500 has recaptured a key support level in relation to the more commonly used cap-weighted S&P 500 index...Willie points out that this relationship actually began to turn up in late 2018 and is the continuation of a trend that emerged over the fourth quarter of last year: "The equal-weight S&P 500 has moved from lagging its cap-weight counterpart (which had benefited from the strength of just a handful of mega-cap Technology stocks) to moving into a leadership position."

A second piece of evidence that points to broad indices looking more healthy is the percentage of stocks that are trading above their 200-day Moving Averages in all of the major US indices. Willie brings to our attention that "the down-trends that emerged over the course of 2018 have not (yet) been broken, it is encouraging that the thresholds that served as resistance in October and November have already been broken." When considering this development, we can see that breadth is actually looking a little better than price, as the S&P 500 remains slightly underneath the 2800 level that served as resistance in October/November.

While the developments mentioned above are clearly positives for equity markets, Willie does note one theme that should signal a sign of caught: sentiment. Specifically, according to Ned Davis Research (NDR). short-term sentiment in has flipped from very high levels of pessimism to very high levels of optimism and is "at a level that suggests near-term risks are elevated." Given the all the data that Willie has supplied us, I think it's safe to say that broad equity markets are looking healthy, which is hard to argue with considering the very broad rally we have seen from the December lows. However, given that this recent move has seen almost no "pause", other than maybe a day or two, and short-term sentiment is overly optimistic when looking at historic levels, there is a good chance we could see a slight correction in the coming weeks.