It’s an age-old Wall Street adage attributed to legendary market technician Bob Farrell: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”
That quote has been bandied about quite a bit recently, having been cited in research notes published by Rosenberg Research founder (and Merrill Lynch veteran) David Rosenberg and others as the stock-market rally in 2023 has been largely driven by a handful of megacap stocks.
From the beginning of 2023 through Friday, the 10 largest U.S.-traded stocks have accumulated roughly $2.5 trillion in market value. That’s more than the market-capitalization increase of the entire S&P 500
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These stocks have helped carry the two best-performing sectors on the S&P 500, communication services and information technology, to year-to-date gains of more than 22%, nearly triple the gains of the broader index, which is up more than 7.5% so far this year, according to FactSet data.
Some Wall Street analysts have cited weak breadth as a reason investors should be cautious with stocks, despite this year’s gains.
“Equity-market breadth by some measures is the weakest ever, with the narrowest stock leadership in an up market since the 1990s,” said a team of JPMorgan equity strategists in a note shared with MarketWatch on Monday.
As analysts look for clues, BTIG’s Jonathan Krinsky crunched some historical data.
Through Friday, the S&P 500 has closed above its 200-day moving average for 34 consecutive sessions. Despite these gains, only 47% of S&P 500 components were trading above their 200-day moving averages — an unusually wide divergence over the past few decades, Krinsky said.
Krinsky found that, going back to 1990, there have been 29 instances where the S&P 500 has traded above its 200-DMA for at least 34 sessions.
Market breadth has only been weaker during two of those occasions, Krinsky found. By now, 69% of S&P 500 constituents have typically moved above their 200-DMAs, according to Krinsky.
What might this mean for stocks? Krinsky found some evidence to support his view that stocks are likely headed lower. For example, four of the six periods where breadth was the weakest occurred near market peaks, including in December 1999, July and September 2000, and October 2007.
Krinsky told clients this divergence between the market’s winners and loses will likely grow wider until the main indexes ultimately “catch down” to the underperformers.
The S&P 500 eked out a gain on Monday, rising less than 2 points, or less than 0.1%, to 4,138.12, according to FactSet closing data. The Dow Jones Industrial Average
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