Breadth So Bad, That It’s Good

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The stock market has caught investors by surprise…

Despite facing the worst bank crisis since the 2008 financial sector meltdown, we saw solid gains for the first quarter.

The Nasdaq Composite even managed to jump 17% – its best three-month stretch since 2020.

However, this action in the market is concerning… Because the number of stocks driving the Nasdaq and S&P 500 gains has dwindled. And that’s leading to plenty of calls that this rally is in jeopardy.

Let me give you an example…

The 19 largest technology stocks added $2 trillion to their market cap in the first quarter. But meanwhile, over 80% of all listed stocks were trading below their 50-day moving average (MA) near the end of the first quarter.

While popular indexes were painting a rosy picture, many stocks were stuck in downtrends.

Participation in the stock market’s underlying trend is referred to as breadth. And if there’s one defining feature of 2023, it’s that breadth has been terrible so far.

But before you rush for the exits, you should consider that when breadth is so bad – it can be good.

How to Use Breadth

There are different ways to use stock market breadth to help you determine a potential change in the stock market’s direction.

One common method is to use participation to assess the strength of the stock market’s underlying trend. When fewer stocks are participating, that means the underlying trend is crumbling.

You can also use breadth to monitor extremely oversold conditions… a sign of selling pressure that indicates a washed-out market.

When the number of stocks in downtrends hits an extremely low level, that’s a good sign most investors are throwing in the towel – which could be your next buying opportunity.

Breadth is Washed Out

The McClellan Summation Index is a breadth metric that track signs of markets becoming overbought or oversold.

This indicator is built by looking at a trailing difference of advancing versus declining stocks on the New York Stock Exchange. When it’s moving higher, that implies gaining stocks are outpacing falling ones and vice versa.

And something interesting is happening with this gauge…

Last week, under-the-hood selling in the market reached an extreme. You can see that in the chart below where readings of -500 and below mark oversold levels.

Not only did the index touch that level, but it’s starting to improve and turn higher.

I apply a 10-day MA (red line) to the index to generate buy and sell signals, and you can see a positive crossover recently occurred (green circle).

On March 29, I showed you how fearful sentiment could support a rally in the stock market. Now, with breadth hitting bearish extremes, this rally could have more room to run.

Best regards,

Clint Brewer
Analyst, Market Minute

What are your predictions for the current market rally?

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