The S&P 500 .SPX has continued to rally this year despite headwinds including the conflict in the Middle East and rising U.S. Treasury yields, prompting some investors to question whether the market is vulnerable to a near-term pullback or correction.
The S&P 500, Nasdaq .IXIC and Dow Jones Industrial Average .DJI have posted double-digit gains so far this year. However, concerns may be overdone, with the rally likely to continue, according to a SentimenTrader model that tracks signals tied to interest rates and crowded market positioning.
“Market support” is determined by the three-year rolling percentile of the equity-yield advantage ratio, which gauges the cushion that earnings and valuations provide relative to the prevailing interest-rate environment.
“Market constraint” combines the 10-year U.S. Treasury yield, which captures rate pressure, with “dumb money confidence,” a measure of investor sentiment crowding, and “hedge fund exposure,” which tracks professional positioning.
The model currently stands at 58.59, indicating that market support continues to outweigh market constraint, according to SentimenTrader's Jay Kaeppel.
“Readings near 50 mark balance, above 50 support dominates, below 50 constraint dominates, and the distance from 50 measures the gap. Under the current numbers, support clearly dominates, though the constraint side itself sits high within its own three-year range. This is a well-supported market, and not a cheap one,” he says.
Kaeppel also noted that when the model's five-day average crosses above 58, subject to a 42-day cooldown period, it produces a signal that has been relatively rare, appearing only 16 times since 2001.
“Under the current reading stocks still look worth holding, with no guarantee of escaping drawdowns along the way,” he says.
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