Beneath a stock market that goes from one record to the next lies a concerning trend for some Wall Street strategists: Fewer stocks are buttressing the advance.
The S&P 500 Index is now headed for its ninth consecutive day where the number of constituents falling outnumbers those rising. That’s longest such streak since Bloomberg started collecting the data in 2004.
The development signals that the foundation of the stock-market rally is weakening, with strength in technology high-flyers offsetting softness everywhere else. While a top-heavy market is nothing new, it comes at a time when a 27% rally this year has only heightened the sense that valuations look stretched and positioning elevated.
Strategists at SentimentTrader have described the phenomenon as showing “early cracks” in the “long, strong” bull market for US stocks. “Investors have started to hesitate,” they wrote in a note to clients.
An equal-weight version of the S&P 500 that makes no distinction between Amazon.com Inc. and News Corp. declined 0.1% on Thursday, resuming its downward path. It fell for seven consecutive days through Tuesday, which ties for the longest losing streak since 2018. Meanwhile, the Magnificent Seven gauge of titans including Alphabet Inc., Microsoft Corp. and Nvidia Corp. has gained in eight of the past 10 days amid renewed optimism for all things artificial intelligence.
“Breadth has been deteriorating rather quickly while the market makes new highs,” Craig Basinger, the chief markets strategist at Purpose Investments, wrote in a Dec. 9 note. He noted that fewer stocks in the US benchmark are trading above key support lines.
Breadth Warning
Roughly half of S&P 500 members are currently trading over their 50-day moving average, while 39% are above their 20-day moving average and just 27% are above their 10-day averages.
That means the S&P 500 currently offers the lowest proportion of its members trading above their 10-day and 20-day moving averages out of all major indexes globally except for South Korea, where markets are still reeling from the shock of its short-lived imposition of martial law.
“Market breadth has been poor, and is on the verge of generating a sell signal,” said Lawrence McMillan, president and founder of McMillan Analysis Corp., in a note published Dec. 6. He said that would mark the first confirmed sell signal from the indicators watched by his firm, if it occurs.
Still, it may depend on which moving average one sees as most important. For Gillian Wolff at Bloomberg Intelligence, the concentrated nature of the benchmark’s advance is roughly within the range it’s held to all year. She pointed to the percentage of S&P 500 members trading above their 200-day moving average hovering near 73%, within the 70% to 80% range the market has seen this year.