The Message from Market Breadth

I recently came across “The Boys in the Boat” by Daniel James Brown, the true story of the University of Washington’s eight-oar rowing crew that represented the United States at the 1936 Berlin Olympics and won gold.

As I pictured the rowing races, I was struck by how well this sport can illustrate what happens in the stock market.

Imagine one boat jumping out to an early lead, powered by a couple of exceptionally strong rowers. As the race continues, however, another boat begins to gain. Rather than relying on just a few strong rowers, the entire crew is pulling hard, in rhythm, and in the same direction.

The stock market can work in a similar way. A handful of very large companies can propel an index higher for a while, but a market rally is generally more encouraging when many companies are participating and pulling in the same direction. This participation is what we refer to as “market breadth.”

Mega-Cap Comeback

The S&P 500 has remained surprisingly resilient despite several headwinds, including higher oil prices, rising Treasury yields, and tighter monetary policy. Much of that strength has been driven by a relatively narrow group of mega-cap technology companies, particularly the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla).

Beneath the headline index, however, market participation has narrowed considerably. Since the S&P 500’s recent low in July, the index has gained approximately 5% and returned to near-record highs. Yet the percentage of stocks trading above their 200-day moving average has fallen from 73% to 51%.

The divergence is even clearer when looking at individual stocks. While the S&P 500 Index is just below its record high, the average company in the index remains approximately 20% below its own 52-week high.  

What Does History Tell Us?

Narrow market breadth is not necessarily a signal that positive market momentum is ending. Historically, similar periods have still produced positive returns on average, although those gains have generally been more modest and accompanied by greater volatility.  

Bottom Line

We view narrowing market breadth as a caution flag, but not necessarily a sell signal. The key question going forward is whether more stocks begin participating in the advance.

If participation broadens again, it will provide greater support for the positive market trend. On the other hand, if market indexes continue reaching new highs while fewer stocks participate, the rally could become increasingly dependent on a small number of market leaders and therefore more vulnerable to a setback.

In simple terms, the market’s boat is still moving forward, but right now, fewer rowers are doing much of the work.

As always, please feel free to reach out if you have questions about the markets or your portfolio.  ‍

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Important Information

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable. The information in these materials may change at any time and without notice and its accuracy cannot be guaranteed. Past performance is no guarantee of future results.

Stock investing includes risks, including fluctuating prices and loss of principal.

The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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