One key breadth measure makes new bull market high
Back on March 1st, the S&P 500 index hit a new all-time high and we noted that market breadth was also strong, with the S&P 500 Cumulative Advance/Decline (A/D) Line hitting a new high as well. This is a sign of a healthy stock market and not one that is showing underlying weakness. The advance/decline line is no doubt the most popular of all internal indicators. It is a very simple measure of how many stocks are taking part in a rally or sell-off. This is the very meaning of market breadth, which answers the question, "How broad is the rally? In early May, however, the S&P 500 index was not backed up by a new high in the A/D Line. This was a bit concerning to us, until this week when we saw this negative divergence disappear and the A/D line hit a new high for the first time in almost three months (see chart below).
Source: Bespoke Investment Group
We have seen pushback from the media and other prognosticators lately discussing the fact that most of the gains so far this year for the S&P 500 have come from just a few large cap technology stocks and that the rally is too narrow. Although it is indeed true that a few stocks are helping the markets, this cumulative breadth of the market as represented by this A/D Line would certainly refute the notion that the rally is too narrow. We realize that the breadth of small caps has been weaker than large caps, but, at the end of the day, the S&P 500 makes up over 90% of the U.S. market capitalization. In addition, mid-caps have been holding up just fine in terms of breadth and price.
We view much of this negativity from the media and some others as mostly "noise", as they often don't back up their sentiment with any sort of actual evidence. While it is true the rally is focused in that just twelve stocks in the S&P 500 and six in the NASDAQ have accounted for over 50% of the year-to-date gains, according to a Ned Davis study, having just a few stocks driving performance during up years is actually quite typical. The study shows that since the mid-1980s, when the S&P 500 is up between 3 and 11% for the year, only ten stocks (median) account for 50% of the return (see chart below), while when the NASDAQ is up between 10-25% for the year, only three stocks account for 50% of the return.
Source: Ned Davis Research Inc., Canaccord Genuity
It surely is amazing how negative the overall sentiment continues to be, week after week, month after month, as this secular bull market continues. We realize that there are some sentiment indicators that have been high of late, and varying lengths of time; however, the latest American Association of Individual Investors (AAII) bullish sentiment survey came in at just 30%. This is one of the most widely watched sentiment indicators. The bullish sentiment hasn't been the majority view (50% or higher) for a record 125 straight weeks. Does this sound like a market in euphoria to you?
Our view is that while we may be in the later stages of the cycle, this is not a reason to panic. Our focus remains on the leading indicators that have the longest and most accurate track record for leading a recession, and as of today, the risk is remains low and we reiterate our constructive intermediate to longer-term stance.