If This Market is Anything, it’s Narrow

On a day like yesterday when more than half of the US tech sector was down more than 2%, we are reminded of the benefits of diversification. Yet, diversification would not have helped one participate in the market’s rise to the highest level since February. Indeed, this latest gasp higher in the broad indexes has been led by, according to some measures, the fewest percent of stocks this cycle. Let’s explain.

The first chart below shows the percent of issues in our developed market index outperforming the MSCI World Index. As global stocks break out of a six month long consolidation pattern, only 39% of individual stocks are actually beating the market over the last 50 days. Only one other time in the history of our data did a smaller percentage of stocks outperform the market over a 50 day period, and that was back in 2002 when stocks were experiencing a climactic low. Quite different from today.

Another indicator that suggests rather limp breadth is the percent of issues making new 50 day highs. We’ve been looking for this indicator to expand to the 30%+ range, as it did off the 2016 low, but all year long it has lower highs. As the broad market breaks out of this range, only 9% of them are concurrently making new 50 day highs.

What’s more, despite the headline index accelerating higher, the average stock is actually down 1% over the last 50 days.

Finally, we’ll end on one last rather unsettling negative divergence. Here we show the percent of stocks in an uptrend – those with their 50 day moving average higher than their 200 day moving average. It’s been going down all year despite the headline index having bottomed in February and successfully testing the low in April.

With most price-based internal indicators of trend and momentum, we like to see the internal measure confirming the direction of the headline stock market indexes. When the headline indexes are doing one thing and the internal measures of market health are doing another, like now, it suggests asset class diversification may be more beneficial than intra-equity diversification. At the very least, it’s descriptive of a market that is being led by an ever decreasing number of individual issues, like the FAANGs. Food for thought if FAANG leadership falters.