The Stock Market Looks Overcooked as Rate-Cut Hopes Fade. Where to Go Instead.

Yet the large-capitalization U.S. benchmark nonetheless lost ground on the day. Indeed, only 10 of the 65 technology stocks in the S&P 500 managed to advance in tandem with Nvidia that day, noted Jeff deGraaf, chairman and head of technical research at Renaissance Macro Research, in a podcast Friday. Moreover, the S&P experienced an outside-day reversal, which occurs when the index posts a higher high than in the previous session but closes at a lower low.

That doesn’t necessarily mark a top in the market, but it is indicative of an overbought technical condition and usually means a short-term consolidation. “I wouldn’t make more of it than that, but it suggests that the news was anticipated, and net-net sold, not bought,” he said in an email.

It does, however, indicate a further narrowing of the equity market’s advance to records, including marks set this past Tuesday for the S&P 500 and the

Nasdaq Composite

on Friday, and for the

Dow Jones Industrial Average

the previous Friday. “But history suggests that narrow stock market rallies can last for years,” according to Jonas Goltermann, deputy chief markets economist for Capital Economics. “That was the case for both the 1990s dot-com bubble and the late 2010s ‘big tech’-driven rally,” he wrote in a client note.

Some other disquieting disparities also appeared on the technical front. In particular, transportation stocks have been notable laggards. According to Dow Theory, a move in the industrials should be confirmed by the transports, since the latter companies should have to ship what is produced by the former. Yet, while the DJIA rose to hit the 40,000 level the Friday before last, the DJTA has moved sideways.

While Dow Theory is steeped in history, the divergence between the transports and the broader market may reflect the increased importance of service and technology in the U.S. economy, according to Yardeni Research. “Companies don’t need a truck to provide cloud computing or streaming services,” the firm observed.

Some analysts have suggested that semiconductors have supplanted the transports as a better reflection of the economy, as chips are embedded in nearly every component of the broader economy, says Quincy Krosby, chief global strategist at LPL Financial. Both semis and transports are bellwethers of economic activity, she says. While airlines have been aloft, as the record three million Americans expected to fly over the Memorial Day weekend can attest, truckers and railroads have seen flat to lower volumes as inventories have been worked down.

But what mainly spooked the stock market this past week was a jump in Treasury yields, as expectations for cuts in the Federal Reserve’s federal- funds target rate were pushed back again. The latest reading on unemployment claims showed the labor market remains strong after a statistical quirk a couple of weeks earlier, while flash May purchasing managers indexes showed robustness in both manufacturing and services.

By week’s end, the CME FedWatch tool had fed-funds futures pricing in just a single one-quarter-percentage-point cut this year, from the current target range of 5.25% to 5.50%. A second reduction isn’t seen by futures traders until the policy meeting at the end of next January, rather than in mid-December, as previously anticipated.

With Treasury bills yielding well over 5% and two-year Treasury notes at just under 5%, investors could opt to sit out the stock market for the rest of 2024 in risk-free short-term obligations and enjoy returns equal to those that Wall Street strategists are expecting.

The median year-end target among strategists for the S&P 500 is 5400, just 1.8% above Friday’s close of 5304.72, according to Morningstar. Even after taking into account the 1.35% trailing 12-month dividend yield on the S&P, the 5.38% yield on six-month T-bills (both annual rates) would match the strategists’ median target, without investors having to deal with the uncertainty of what lies ahead of November’s elections.

Did somebody say sell in May?

Write to Randall W. Forsyth at randall.forsyth@barrons.com