A few weeks back, I posted re: market sentiment and noted that sellers were notably unable to push the market lower. That situation led to a nice rise to new highs in SPY/ES. Now we see a very different situation. On Thursday, we broke the 4000 level in SPX, but interestingly, we had 334 stocks registering fresh monthly highs and 75 making new monthly lows. Compare that with over 1000 stocks making new monthly highs in mid-March. In early February, we had over 1100 stocks hitting new 3-month highs. That fell to 939 in mid-March and hit a level of 171 on Thursday. (Data from Barchart.com). In other words, the recent market uptrend has become much more selective. If we look at small cap stocks recently and technology shares, for example, both have failed to take out prior highs. Indeed, overall, it’s been larger cap issues rather than growth names that have performed best of late.
There is a structure to market cycles, in which the market begins with strong upside momentum and a tide that lifts most boats. As the cycle matures, the strength becomes more selective and we can even observe pockets of the market register new short-term lows. With the inability to rise and many traders/investors trapped on the long side, we get a move for the exits and a momentum period of decline, with many stocks making new short-term lows. A dramatic example of this occurred early in 2020, when the market registered 751 new 3-month highs on January 17th and then hit a new index high on February 19th with 503 fresh 3-month highs. What followed was the big decline from the COVID outbreak.
The current breadth weakness in no way predicts a similar decline for the near future. Rather, it is a yellow caution light for the bulls. The market is behaving as it often behaves relatively late in bull market cycles. I am watching breadth closely to see if the bullish sentiment of hitting 4000 might be masking increasing weakness, particularly among the “reopening” and growth stocks that one would expect to be leading the way higher.