This Market Has A Worrying Case of “Bad Breadth”

This Market Has A Worrying Case of “Bad Breadth”
Stéphane Renevier, CFA

19 days ago1 min

The S&P 500’s current rally is being driven by an incredibly small number of stocks (hello, Magnificent Seven), and that has some folks convinced that this narrow “market breadth” is a big warning sign.

And it’s not hard to see their point. A wider market breadth – which would have more of the index’s 500 stocks rising at once – would make the rally seem altogether more sustainable. It would suggest that more industries and businesses are doing well, which would imply greater confidence in the economy. It would also mean that the market is less vulnerable to the ups and downs of just a few companies.

With just 26% of stocks outperforming the broader index, the breadth is at a low that’s rarely been seen before (bottom half of the chart). In fact, the last two times leadership was this narrow were in the Nifty 50 period of the 1970s and during the dotcom boom of the late 1990s. In those cases, stocks did continue to rise for a while. But it eventually ended in tears: with stock prices dropping 50%.

Here’s my view: this is a warning I’d pay attention to, but I wouldn’t lose sleep over it. Pinpoint timing has never been this signal’s strong suit, and there are plenty of other factors driving this market. Yes, it may point to an alarming precedent, but it’s also a sample size of two. So keep this market breadth in mind, but keep in context: it’s a piece of the puzzle, not the whole picture.

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