A Bull Market in Breadth - 1/9/2024
It’s not much of a secret that stock leadership was narrow in 2023. Less than one-third of S&P 500 stocks outperformed the index for the year, and the average stock lagged the index by more than 15% - the largest disparity since 1998.
But there’s a difference between narrow leadership and weak breadth. The story for a good part of 2023 was weak breadth. Not only were a just handful of stocks responsible for dragging index returns higher, but a majority of stocks were struggling. In late May, 65% of S&P 500 stocks were below their 200-day moving average even though the index itself was breaking out to 8-month highs.
Bearish breadth divergences like that can work themselves out in one of two ways: either the index catches down, or the lagging stocks catch up. We got the latter. By year-end, the average stock was up double-digits.
So leadership for 2023 may have been narrow, but the lagging stocks still rose. That’s not bearish.
Today, it’s tough to find anything wrong with market breadth. Thanks to a big, broad rally from the October lows, nearly every stock is in a short-term uptrend. Ninety percent of the index is above its 200-day moving average, and the number rises to 92% if you exclude Energy stocks.
And since mid-November, the average stock has actually outperformed. The equally weighted S&P 500 index bottomed against the market cap weighted index at the exact same place it did back in 2020.
Those short-term trend improvements are quickly turning into long-term ones. The number of SPX members above their 200-day moving average just hit its highest level since 2021.
We can take our trend identification using moving averages to the next level by adding in the slope of the moving average. If a stock is above a rising 200-day moving average, that means prices are higher than they were 200 days ago and higher than they’ve been on average over that period. In short, that stock is in an uptrend. And right now, 69% of large cap stocks fit that description. Alternatively, just 17% are in long-term downtrends.
Momentum indicators are similarly bullish. Contrary to how it sounds, overbought is a good thing. It means the bulls are in control. The strongest stocks get overbought on rallies and stay out of oversold territory on declines. Today, 79% of S&P 500 members are in a bullish momentum regime, meaning their 14-day RSI has risen above 70 more recently than it’s fallen below 30. Once again, the mark is even higher if you exclude Energy stocks.
Moving averages and momentum are all well and good, but nothing says ‘uptrend’ like new highs. More than half of S&P members have set new 52-week highs, and 84% are in a regime of setting new 3-month highs. There’s nothing bearish about that.
What’s more, it’s Utilities, Consumer Staples, and Health Care that are lagging - not exactly sectors you’d expect to see trailing if investors were looking to cut down on risk. Instead, risk-on groups outperforming is a characteristic of bull markets.
So what’s left for the bears?
Not much. But no matter the market, we can always find something to complain about. The biggest, in our mind, is the lack of confirmation from the Value Line Geometric Index. This index is designed to track the median change in stock price, and it says the median stock is still stuck in an 18-month trading range.
That’s not necessarily bearish - but it’s not bullish either. In our continuing bull market checklist, we’d like to cross off ‘Breakout in the Value Line Geometric Index’ next.
That’s all for today. Until next time.