Breadth metrics in the equity market remains supportive of the bullish price trend in the near term for the S&P 500, which traded to another record high yesterday. Breadth on the NYSE is not as strong as the S&P 500 but thus far is not waving a warning flag that catches our attention. From a performance perspective, the Equal Weight S&P 500 is trading a key resistance level relative to the S&P 500 (cap weight) and the resolution from this level could carry important thematic implications.
S&P 500 Breadth
The percentage of stocks in the S&P 500 which are trading above their respective 200-day moving averages is currently more than 93%. It is not often that this metric exceeds the 90% threshold. Looking back to 2011, when the percentage crosses above 90% and the S&P 500 is trading above its own 200-day moving average, the index is higher 63-days (one quarter) later 76.92% of the time for a median return of 3.11%. N = 14 since January 2011.
Shortening the timeframe to the percentage of stocks in the index trading above their respective 50-day moving averages, we can see the reading is a bit lower at ~87%. The index is trading above the 50-day moving average, which has acted as support to recent pullbacks. When the percentage above their 50-day moving averages is greater than 85% and the index is above its own 50-day moving average, the S&P 500 is higher 63 days later 92.81% of the time with a median return of 4.87%. N = 157 since September 2010.
We will also note that this metric has broken above a declining trend line from the breadth peak as the index was rebounding from the pandemic lows.
Taking the timeframe even shorter to the percentage of stocks that are above their 20-day moving averages, the metric is currently near 79%. Since September 2010, when this metric is greater than 75% and the index is above its 20-day moving average, the S&P 500 is higher, 63-days later, 81.31% of the time for median gain of 3.72%. N = 637. Investors who want to make a bearish argument would point out the series of lower highs for this indictor and the fact that it did not confirm yesterday’s record close.
New York Stock Exchange Breadth can be described as strong from a longer-term trend perspective but weakening in the near-term. The Advance / Decline Line is supportive of further upside in the equity prices, trading at record levels. In the short-term, the percentage of stocks above their respective 20-day moving averages has been marking a series of lower highs and is below the important 60% level. In the intermediate-term, the percentage of stocks above their 50-day moving averages is hovering near the 60% level. The percentage of stocks above their 200-day moving average remains strong, near 70%.
Another way to think about market breadth is to look at the performance of the S&P 500 on an equally weighted basis relative to the market cap weighted S&P 500. From 2017 – 2020, the ratio was declining, pointing to more pronounced leadership from the largest stocks in the index. This was a big part of the bearish thesis on equities at the time, too few names were leading the charge. However, that dynamic began to shift as the market emerged from the pandemic lows. The EW S&P 500 is now leading the S&P 500 as small caps have been leadership and investors have rotated away from the mega cap stocks that drove performance for the better part of three years.
The ratio is trading into a key level of resistance and its resolution at this inflection point will go a long way in determining thematic leadership in the weeks ahead. Failure would likely point to renewed leadership on the part of the largest names in the index, while a continuation to the upside would point to small stocks remaining the best relative performers.