Is The Market’s Bad Breadth Predicting A Downturn?

Published on: 05/30/2023

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss the future of the stock market based on market breadth: how many stocks are participating in the rally.

 

TRANSCRIPT

TONY:

Welcome to another edition of Chart Talk.  I’m Tony Ogorek.  I’m here with Jeff Viksjo. And Jeff, today, we’re going to talk about the market’s bad breadth, b-r-e-a-d-t-h, and whether it presages a downturn in the near future.  So, let’s talk just a little bit about market breadth and why it should be of interest to our viewers.

 

JEFF:

Yea so Tony, we’ve had a nice start to the year this year, and we needed it after last year.  And market breadth, what it just means, is how many stocks are participating in the rally.  Is it being driven by a few names, like the largest, or are mostly stocks rising all together?  This chart really gets to that point very quickly, and it just shows you each stocks contribution to the S&P500’s return.  We have all the big tech stocks listed.  So, Apple alone, one stock, has contributed the whole index to be up 1.59% so far this year. You can see we’ve got Nvidia and Microsoft, the big ones listed, and then all other stocks, so the other 400, say 492 that aren’t on this page, contributed 1.28%.   So, Apple contributed more than the other 490, call it.

TONY:

Yea, so, it’s a, you know again, it’s very widely held.  It’s a company that’s worth $2.6 trillion. Microsoft is worth about $2 trillion.  That’s why they’re getting this level of participation in the capitalization weighted index.

Now, let’s take a look at a couple other charts.  This one takes a look at the weight of Microsoft and Apple in the index.  And you can see how that has continued to increase along with the share prices.

And then Jeff, this next chart takes a look at all of the supposed, FAANG companies and what do we see here?  It’s even more so.

JEFF:

Yea, generally, if the line is rising it just means those stocks are outperforming all of the other stocks.  So, those tech names have been a great place to be.  This sort of stopped the last year or two when growth stocks came down and more of the value of the dividend payers.  And we started seeing breadth improve more stocks for participating.  But Tony, it shifted back to growth in these big tech names.  Why do you think that is this year?

TONY:

Well, I think last year, rising rates really impacted growth stocks, which these are, and this year, the expectation is that the Fed is at the end of its tightening cycle.  And because of that growth is going to be looking good going forward.  And that’s really what we are seeing in the market now.

Now, Jeff, we have one final chart.  And this takes a look at market breadth, and it goes back, I think, to 1980, or so.  And it’s interesting.  As you see that bottom line, why don’t you explain this for people, and what this significance has meant in the past.

JEFF:

Yea, really, when you’re looking at this chart, the higher the line it just means the more stocks are participating in the rally; more stocks are close to their 52-week high.  If the line is very low, like we saw in 2000, it was being driven by a very small concentration of stocks.  In 2000, it was those Dot-com tech stocks.  You know, we came back, FAANGs have driven the market the last 10-years.  So that line was falling.  But, like I said, in the last couple years, it’s inched back up, more stocks participated before it’s turned again this year.

 

TONY:

Yea, so the bottom line is, if you looked at this, historically, it would seem as though the market’s set for fall in the near future.  But, when you look at the companies that are concentrations in the index right now, they really are, sort of, the utilities that are powering the knowledge economy that we’ve got today.  They’re incredibly diversified and it doesn’t seem like they’re, necessarily, a bad bet.

So, thank you Jeff.  And thank you for watching this edition of Chart Talk.

 

 


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