Breadth in the U.S. equity market has contracted over the past few weeks despite the S & P 500 trading near all-time highs, indicating that the rally in the major indices has been narrow lately. The contraction in breadth is evident in cumulative breadth metrics like the NYSE cumulative advance-decline line, which has pulled back since mid-May. Short-term momentum is to the downside for the advance-decline line, which has room to next support from the daily cloud model (shaded area on the chart). This suggests that market breadth will likely pull back further in the near term, which is a short-term risk for the major indices as the number of decliners outpaces advancers on the NYSE. Weak breadth behind the market is also reflected in the ratio of the small-cap Russell 2000 Index to the S & P 500, which recently broke down to a new 52-week low. The breakdown marks a continuation of the primary downtrend in the ratio in a setback for small caps relative to large caps. In absolute terms, the Russell 2000 has pulled back since mid-May, aligned with the advance-decline line. The major averages have been able to push higher recently, but there are signs that market breadth is deteriorating in a negative divergence. When there is a negative divergence between price and breadth metrics, it makes us more sensitive to any ‘sell’ signals that arise. Fortunately, while short-term breadth contraction is likely, a breakout in NYSE advance-decline line preceded the current pullback, suggesting that breadth should eventually expand in support of cyclical bull trend in the S & P 500. It is usually healthy to see periods of breath contraction during uptrends, as it can renew demand when markets appear extended. —Katie Stockton with Will Tamplin Access research from Fairlead Strategies for free here . Learn more about the Fairlead Tactical Sector ETF (TACK) here . DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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Katie Stockton on whether it’s time to start worrying about the weak market breadth
Jun 10, 2024
