Piper Sandler warns on equity exposure as market breadth weakens

Investors have been cautioned against taking on excessive risk in equities as recent market data indicates weakening breadth and momentum, according to a recent note from Piper Sandler. On Tuesday, the S&P 500 declined by 0.48%, while the equal-weight index managed to gain 0.04%. This divergence suggests that the market is experiencing a shift in preferences rather than a widespread sell-off.

Within major indices, certain sectors are performing better than others. The Communications sector surged 2.2%, breaking above its 200-day moving average resistance, while the technology sector exhibited mixed results. However, the SMH semiconductor index suffered a significant drop of 4.75%, likely due to concerns over AI safety and its impact on semiconductor and infrastructure stocks.

Conversely, software and cybersecurity stocks experienced notable gains, with software stocks climbing 5% and cybersecurity stocks surging 6%, with CrowdStrike reaching a new all-time high.

Piper Sandler's market breadth indicators, including the 26-Week New Highs and 40-Week Technique indicators, are currently signaling a sell position. Additionally, their MACE trend analysis reveals that more stocks are currently in weekly downtrends compared to uptrends. Notably, the percentage of stocks in defined uptrends has decreased from 53% to 43% in the previous week.

Economic factors also play a role in the current market environment. The 10-year Treasury yield briefly rose above 5.0%, while crude oil prices approached $105 before settling near $101.50. Piper Sandler warns that a sustained increase in yields toward targets of 5.2% and 5.31% could compress equity multiples. Furthermore, a move in oil prices above $106 could push the S&P 500 and Nasdaq closer to their 50-day moving averages, providing support for these key indices.

While the S&P 500 and Nasdaq both maintain support near their 50-day moving averages, Piper Sandler advises investors to exercise caution and wait for improved market participation before increasing their equity exposure. The recent rise in AI safety warnings, coupled with an oil-driven spike in the U.S. 10-year bond yield to 5.0%, suggests a potential period of caution and monitoring before making significant changes to investment strategies.