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Weekly Market Report: Breadth Deterioration

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The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium ArticlesWeekly Premium Articlesor an All-in-One subscription.

Reminder: For informational purposes only, we have updated the format of the weekly market reports to include long-only signals for ETFs from two cross-sectional momentum strategies, one for capital markets and another for factors.

Included in this report:

  1. Weekly summary.
  2. Breadth Deterioration.
  3. Market positioning update.
  4. Stock market forecast.
  5. Capital markets analysis.

1. Weekly Summary (June 10–June 14, 2024)

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  • Stocks (SPY) rose 1.4% to new all-time highs on better-than-expected inflation data.
  • Gold (GLD) gained 2% amid rising volatility. The 21-day annualized volatility of the GLD ETF has risen this month to 19.6% from 15.9% at the end of last month.
  • After an unchanged CPI and expectations of accelerating disinflation, bonds (TLT) surged 3.5%.
  • Commodities (DBC) rose 1.4% in response to rising energy prices. Crude oil futures gained nearly 4% on the week.
  • The US dollar index (UUP) ended the week up 0.8%, despite reports of pending dedollarization.
  • Gold (GLD) has outperformed stocks (SPY) since January 3, 2022, by a wide margin, with a return of 26.2% versus 18.3%, respectively.
  • Since January 3, 2022, bonds (TLT) have been down 31.2%, while large-caps (SPY) have gained 18.3%.
  • The technology sector (XLK) surged 5.6% on the week to new, all-time highs. Financials (XLF) and industrials (XLI) fell 2% and 1%, respectively.
  • Stocks (SPY) and the technology sector (XLK) are in overbought territory.

2. Breadth Deterioration

Stock market breadth is one of the most abused measures by analysts and possibly one of the least understood. The availability of many indicators to measure breadth increases confirmation and selection bias. While it is true that stock market breadth has deteriorated recently, it is not a sufficient indicator of a market top. The reality is that cap-weighted indexes can forge higher as long as the few mega-caps that drive them higher have solid earnings and fundamentals.

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The relative performance chart year-to-date shows a gain of 47.7% for the magnificent six (AAPL, META, MSFT, NVDA, AMZN, and GOOGL). All these companies have something in common: they jumped on the artificial intelligence bandwagon early on. The Nasdaq-100 index is up 16.8% and the S&P 500 index is up 13.9%. It is clear that mega-cap magnificent stocks have been the driving force behind stock market returns this year.

The Nasdaq-100 and S&P-500 equal-weight indexes are up only 4.3% and 3.4%, respectively. The Dow Jones Industrial Average is up only 2.4%. Small-cap stocks are struggling with high interest rates, and the Russell 2000 index is down 1% for the year. The picture is clear; the market has very low breadth. Is this an ominous sign?

There are no technical indicators that are sufficient for price action, as I have stated both on this blog and in my book Fooled by Technical Analysis. Indicators, including those that measure breadth, are derivatives of price action. Consequently, focusing on these indicators results in a loss of information. Stock markets have the ability to rise despite low or even declining breadth for longer than short sellers can stay solvent. Following simple indicators is one way of dealing with these extreme market conditions. One of the worst decisions is to rely on confirmation bias and random market calls based on narratives. When market price action operates near the tails of the returns and breadth distributions, as is currently the case, both technical and fundamental analysis are fraught with difficulties. The goal should be to maximize risk-adjusted returns through sound diversification and, for those who are a bit more advanced, minimize tail risk through hedging.

For a more in-depth breadth analysis, see Section 5 below.

3. Market positioning update

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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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