The narrowness of the market rally has been getting increased attention. Is it really that important?
Yes, say multiple analysts. Barclays is concerned by the “extreme narrowness” of the rally, while UBS says narrow leadership has historically been “a hallmark of late-stage bull markets rather than the start of a more prolonged upswing”. That’s echoed by BTIG’s Jonathan Krinsky.
The broad Russell 3000 index has rallied since bottoming more than 150 trading days ago, but only 36 per cent of stocks were recently trading above their 200-day average. Ordinarily, about 70 per cent of stocks would be trading above that level at this stage in a rally, says Krinsky. His take: if this is a sustainable bull market, it’s unlike any over the past 30 years.
Technical strategist Willie Delwiche agrees, saying the “generals” (mega-cap tech stocks) are “leading a charge” but the “foot soldiers” are “refusing to take the field”. Index gains are built on an “increasingly shaky breadth foundation”. The situation, he says, “doesn’t seem very bull market-y”.
However, BMO’s Brian Belski offers more hopeful data. Looking at previous cases where stellar runs by the five largest stocks ended, he found the S&P 500 enjoyed strong gains over the following six- and 12-month periods. That suggests indices need not fall if the mega-cap rally peters out – not if investors rotate into other sectors, which can then take the market baton.