Get the Balance Right

The recent broadening out in market breadth has been accompanied by frothier investor sentiment, but using sentiment as a market-timing tool is tricky (if not impossible).

It's been 285 days since the S&P 500®'s bear-market low on October 12, 2022; since then, the index is up nearly 27%. The Nasdaq has trumped that with a 37% return since its low on December 28, 2022. There were three characteristics in play last October that provided the "set up" for the S&P 500's rally that's ensued: dour investor sentiment, oversold indexes, and positive breadth divergences. In terms of the latter, you may recall that at the October low, the S&P 500 Index had taken out its mid-June 2022 low. However, the breadth under the surface was improving.

Fast-forward to the present, investors are not getting served the trifecta of last October. Although breadth has been improving relative to the extreme concentration that characterized the market through May this year, investor sentiment is at best complacent, and at worst, frothy; and the market is clearly not oversold.

Taking a closer look at the market's health via breadth statistics, it's clear that conditions have mostly improved over the past couple of months. At a broad level, the S&P 500 is faring better than its peer indexes (the Nasdaq and Russell 2000), but the good news is that participation started to broaden in June.

As shown in the chart below, nearly 90% of S&P 500 members are trading above their 50-day moving average, which is the highest since the end of 2022 and close to the 90% threshold that has historically been key in confirming uptrends (note: the index cleared that level in June 2022 but it was a failed signal). The Russell 2000 isn't too far behind, but the Nasdaq is taking longer to catch up (still far from its peak earlier this year).

S&P 500 leading the way