Weak Breadth? Not Anymore

Remember just a few short months ago, when weak market breadth was the hottest topic around?

Stock indexes shook off the short-lived March banking crisis and broke out above key resistance levels in early May. Then they kept on going. Fueled by a handful of mega cap growth names, prices rose further and faster than just about everyone expected. And with the hype around AI accompanying the move, the word ‘bubble’ got tossed around more than a few times.

Any time stock prices rally, you can always find someone that’s bearish about the future – some people have made a career out of finding reasons to be negative. In May, though, the reasons weren’t all that hard to find. The majority of stocks weren’t participating.

I covered the issue in a May 23 report. At the time, 41% of S&P 500 stocks were below falling 200-day moving averages. In other words, they were in clear technical downtrends. On a shorter-term timeframe, the number of stocks above their 100-day average stood near 40%, down from 85% at the end of January. Additionally, the number of stocks setting new highs had peaked months before. Breadth was getting worse with time, not better. None of that seemed consistent with the rapid rise we were seeing in the indexes, so it was easy to understand why negativity was so widespread.

I closed that note with a word of caution to the bears:

Weak breadth can be overcome. Just because the majority of stocks aren’t participating doesn’t mean we should ignore higher prices. Weak breadth could absolutely be foreshadowing a failed breakout that sends markets back to the October lows. But we could just as easily see the mega caps stall near current levels while money rotates back into weaker areas of the market.

I was only half right.

The market laggards have indeed come back with a vengeance, but the mega caps didn’t stall too much at all. In short, weak market breadth is no longer a concern.

The percentage of S&P 500 stocks above their 200-day is up near 70%, an above average reading based on the last 30 years. And when the percentage stocks above their 200-day is greater than 70%, the index has a win rate of 83% and an average gain of 10.5% over the next 12 months. Both those metrics are above normal, too.

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When we include the trend of the long-term moving average, we see similar strength. Two-thirds of stocks are in technical uptrends, while only 16% are below falling moving averages. Information Technology, the largest sector by market cap, has nearly 90% of its membership in a technical uptrend.

On a shorter-term timeframe, the recent strength in the cyclicals is clear. Energy, Materials, Industrials, and Financials all have more than 80% of stocks above rising MAs. Of all the sectors, only Consumer Staples has fewer than half of its constituency in an uptrend. But even there, the number of outright uptrends outnumbers the number of downtrends (43% vs. 35%).

And when stocks are in uptrends, new highs tend to follow. Eighty-four percent of stocks are in a regime of new 3-month highs, meaning they set a new 3-month high more recently than they set a new 3-month low.

In time, that should result in more new 52-week highs. Already, though, more than half of the S&P 500 is in a regime of new one-year highs, led by Energy, Industrials, and Information Technology.

Momentum is bullish, too, especially in risk-on areas of the market. Almost 90% of Industrial sector stocks are in a bullish momentum regime, meaning they’ve hit overbought territory more recently than they’ve been oversold. That metric is above 50% in every sector but Utilities and Consumer Staples.

And for good measure, how about the S&P 500 Advance-Decline line? It’s already setting new all-time highs, even though the SPX is still 5% away from the bull market peak it set in January 2022.

Weak participation? This isn’t April anymore.

Breadth today is a tailwind.

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