There are plenty of reasons to doubt the stock market’s recent advance — trade-deal progress is scant, economic data is souring and outlooks from US firms are the worst in years. In spite all of that, one measure, at least, suggests that investor confidence is growing in companies both big and small.
An equal-weighted version of the S&P 500 Index, which makes no distinction between the market value of a behemoth like Amazon.com Inc. and relative minnow like Axon Enterprise Inc., has outperformed the standard cap-weighted S&P 500 for six consecutive sessions. It’s the longest streak of outperformance since January 2023, and signals optimism the ability of a larger swath of companies to drive earnings, the economy, and of course, the stock market.
Every S&P 500 sector has advanced since Trump’s April 9 pause on his harshest tariffs, with gains led by the information technology, industrials, and consumer discretionary segments. Strong earnings have supported megacap tech stocks, and, simultaneously, smaller companies in defensive sectors have become attractive holdings in an unpredictable macro environment.
“It’s kind of like building the foundation of a house — the more stocks that are participating, the stronger that this market is,” said Craig Johnson, chief market technician at Piper Sandler & Co. “Why does breadth matter? It tells me just how many stocks are working.”
An in-house measure of market breadth tracked by Johnson — the 40-Week Technique Indicator — which tracks the number of stocks trading above their 40-week moving average versus the 10-week moving average, is on the cusp of flashing a buy signal, “a sign that we’re inflecting and we’re strengthening in markets,” he said.
Moreover, the S&P 500’s cumulative advance-decline line — another breadth gauge — has reached new highs, an occurrence that usually precedes gains in the index over the upcoming weeks and months, according to Johnson.
Strategists at Ned Davis Research last week also boosted their allocation to stocks after souring on the asset class during last month’s volatility, as a number of the firm’s breadth readings set off positive cues. Among them was the ratio of 10-day risers versus decliners triggering the first bullish signal since February 2023.
“The concept behind breadth thrusts is that the strongest rallies have most stocks participate,” a team led by Ed Clissold, chief US strategist for the firm, said in a note to clients. “If a few run into trouble, many others remain in uptrends to propel the popular averages higher.”
Although stock participation has improved as the rebound has picked up, it has disproportionately favored sectors that are further from the center of the trade war, according to Kevin Gordon, senior investment strategist at Charles Schwab & Co.
“Parts of the market that are oriented toward the consumer, freight, and energy have seen the weakest rebound, which fits with the current economic backdrop,” he said. “I think the next phase of this rebound will need to include those parts of the market in order for us to transition from the recovery phase to a sustainable rally phase.”
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